Key Points
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Alphabet has essentially established itself as the gateway to the internet.
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The company’s built-in advantages should pave the way for strong earnings growth in the coming years.
- 10 stocks we like better than Alphabet ›
In my view, one of the most intriguing megacap artificial intelligence stocks to buy and hold over the next five years is Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG). The company has the most complete AI stack and multiple built-in advantages. With $1,000, an investor can buy three shares of the AI stock.
Throughout history, one of the biggest advantages a company can have is distribution, whether that be Coca-Cola with soda or Microsoft with its pre-installed operating system and software bundles on PCs. This is no different with AI, and that is one area where Alphabet continues to shine.
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Alphabet has essentially established itself as the gateway to the internet. This comes through its ownership of the world’s most used browser and smartphone operating system, Chrome and Android, as well as a revenue-sharing deal to be the default search engine on Apple devices, which helps it capture much of the rest of the market. Thanks to this, Alphabet can get its Gemini-model-powered AI solutions front and center with consumers without them having to download separate apps or change their normal routines. Tools like AI Overviews and AI Mode bring AI directly to consumers, while its powerful two-sided ad network helps it monetize consumer AI better than new frontier model start-ups.
The company’s biggest edge, though, is on the hardware side. Alphabet was at the forefront of developing custom chips to run its operation more than a decade ago, and built its entire hardware and software stack around its tensor processing units (TPUs). As a result, it now has the most powerful custom AI accelerators. This benefits it in a few ways.
First, it helps train its Gemini model and run inference at a much lower cost than companies that rely on Nvidia‘s graphics processing units (GPUs). Together with its distribution and ad network advantages, this puts it in a strong position in consumer AI. Second, Alphabet realizes better returns on its cloud computing investments when it uses its own chips. The company has said it expects to see a return on its AI infrastructure investments within two years, but that this is halved when it can use its own chips.
Finally, Alphabet’s TPUs have proven so powerful that Anthropic has begun buying them directly for use in its own data centers. The two companies, together with co-developer partner Broadcom, signed an agreement in which Broadcom will deliver the chips to Anthropic. This creates another high-margin revenue stream for Alphabet. Altogether, Anthropic has committed to spending about $200 billion with Google Cloud over the next five years.
Where could Alphabet trade in five years?
Analysts are currently expecting solid growth from Alphabet over the next several years. The current consensus projects revenue to climb from just under $500 billion this year to $1.13 trillion in 2031. Adjusted earnings per share, meanwhile, are projected to jump from $11.81 in 2026 to $29.07 in 2021.
If we assume Alphabet’s adjusted EPS grows by about 15% in 2032, that would bring it to about $33.43. The stock currently trades at a forward price-to-earnings (P/E) of nearly 29 times, but let’s assume, as growth slows, that the multiple compresses a little. Placing a 20 to 25 times forward P/E multiple on the stock would have it trading between $670 and $835 in five years. A $1,000 investment would be worth between $2,000 and $2,500 in 2031. That’s between a 100% return at the low end and nearly 150% at the high end.
I’d view that more as a base case, since I think the company could see greater growth in its AI infrastructure and chip business. It also has bets on robotaxis (Waymo) and quantum computing that could potentially start to pay off in five years. As such, Alphabet stock looks like a buy now.
Should you buy stock in Alphabet right now?
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Geoffrey Seiler has positions in Alphabet and Broadcom. The Motley Fool has positions in and recommends Alphabet, Apple, Broadcom, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.
