Nowadays, investors can’t go anywhere without hearing about AI. With OpenAI’s ChatGPT dominating the generative AI discourse with its first-mover advantage, Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) appears lost in the woods with its counteroffering Bard (now named Gemini). Still, Alphabet effectively owns the internet with its Google ecosystem. Therefore, I’m bullish on GOOGL stock because the underlying enterprise has arguably the better potential to make digital intelligence actually work.
GOOGL Stock Holds the Cards Despite Its Second-Mover Disadvantage
As TipRanks contributor Joey Frenette rightfully stated early last year, OpenAI enjoys first-mover advantage in the generative AI ecosystem. Given the company’s close relationship with Microsoft (NASDAQ:MSFT), a real possibility exists that the technology giant’s Bing search engine could take share away from Google Search. That’s because Bing now incorporates ChapGPT.
As Frenette explained, “Microsoft may finally have what it takes to break Google’s moat and take some serious share away from the search top dog.” In addition, with Microsoft incorporating digital intelligence across its various software offerings, its usage metrics could swell. Notably, Frenette stated, “As usage increases, so too will the dataset that could help fuel future updates.”
However, here’s the thing: as mentioned earlier, my TipRanks colleague wrote this article a little more than one year ago. At the time, the folks at Alphabet appeared to be in panic mode, pushing Bard to be ready for prime time. Significantly, “More ChatGPT users could translate to fewer Google searches at a time when ads are already feeling the heat.”
Nevertheless, as more and more people used generative AI for their work, school assignments, or just for plain fun, they discovered a glaring caveat: AI really isn’t that useful.
According to a November 2023 report by Retool, a software company, a survey of more than 1,500 tech workers – including software engineers, business leaders, and executives – across multiple industries gave a less-than-ringing endorsement of AI. Specifically, 51.6% of respondents stated that AI is overrated.
That’s not great news for OpenAI and, indirectly, Microsoft. However, it gives a significant opening for GOOGL stock. To be sure, if a small majority of tech experts find AI to be overrated, that label naturally impacts Alphabet.
However, the impact isn’t the same. Alphabet suffers from a second-mover disadvantage. So, if AI itself is problematic, both Alphabet and its digital intelligence rivals are basically back to square one. Relatively speaking, that’s a plus for GOOGL stock.
It’s Not About Being First but Being Better
If given the choice, having a first-mover advantage is better than not having it at all. At the same time, a company with said advantage must do something with it. For GOOGL stock, its saving grace is that no one has fully capitalized on the promise of generative AI.
In many ways, Alphabet finds itself in the same situation as the lidar industry. A laser-based detection system, lidar commands the potential to bring autonomous driving to the masses. A few years ago, analysts identified Velodyne Lidar – which was eventually bought out by Ouster (NYSE:OUST) – as a top buy in the namesake industry because of its first-mover advantage.
However, the severe decline in the market value of Velodyne matched that of its peers. Going first was a nice initial boost. Unfortunately, autonomous driving hit some snags, similar to the generative AI ecosystem. After the early buzz faded, investors are seeking substance over style.
For AI specifically, the output that we receive from digital intelligence platforms is simply not trustable. For instance, in a study published by JAMA Pediatrics early this year, ChatGPT incurred a diagnostic error rate of more than 80%. Not only that, but the dataset was sizable, featuring pediatric cases from the past 10 years.
As a research assistant, ChatGPT is simply not up to snuff. If anything, the platform destroys value because a human operator is required to verify the validity of its answers.
In fairness, GOOGL stock isn’t a sterling AI-specific buy at the moment; after all, its chatbot has been making errors from the get-go. However, as I stated earlier, Alphabet effectively owns the internet because of its Google ecosystem. If the company can find a way to engineer its renamed Gemini chatbot to self-validate its own answers (via Google Search) before giving them to users, this upgrade could significantly enhance trust.
And if people can trust the answers that they receive from AI, that would be a true game-changer. Therefore, GOOGL stock is potentially better positioned than many investors realize.
Possibly Better Valuation Benefits Alphabet
Another factor that may ultimately benefit GOOGL stock is its valuation. While Alphabet isn’t exactly a sterling deal, it might be better than some of its closest rivals. For example, the company’s revenue in the five years from 2019 through 2023 expanded at a compound annual growth rate (CAGR) of 17.6%. In contrast, Microsoft’s revenue adjusted for the same calendar period expanded at a CAGR of around 13.9%.
Nevertheless, GOOGL stock trades at a trailing-year revenue multiple of 5.76x, whereas MSFT trades at 13.6x. Granted, both serve different industries, though the two companies also share significant overlap. However, with Alphabet’s ability to potentially integrate Google’s vast data mine with its AI platform, the edge over the long run just might go to GOOGL.
Is GOOGL Stock a Buy, According to Analysts?
Turning to Wall Street, GOOGL stock has a Strong Buy consensus rating based on 29 Buys, eight Holds, and zero Sell ratings. The average GOOGL stock price target is $164.59, implying 20% upside potential.
The Takeaway: Second Place Isn’t Bad for GOOGL Stock
Currently, OpenAI’s ChatGPT seems to be hogging the generative AI spotlight, thanks to launching ahead of the competition. Ordinarily, that might put rivals like Alphabet in a bind. However, the issue with AI is that it’s simply not trustworthy, effectively putting all players on even ground again. That suits GOOGL stock just fine. Thanks to its ubiquitous Google ecosystem, Alphabet arguably enjoys the more credible path to a trustworthy – and therefore superior – AI platform.
