Semiconductor stocks have been hotter than a pistol ever since ChatGPT was launched in late 2022. Since then, a virtual tsunami of new generative artificial intelligence (AI) applications has swept in and made high-powered graphics processing units (GPUs) a red-hot commodity. Leading this charge is none other than Nvidia (NASDAQ: NVDA), whose sales and stock price have been shooting up like a skyrocket.
After watching Nvidia’s share price soar by a staggering 222% during the 12-month period that ended Wednesday, it’s natural for some investors to feel a tad jittery that the stock may have surged too far too fast.
Nvidia is scheduled to release its fiscal fourth-quarter results on Feb 21. During its fiscal third quarter, which ended Oct. 29, total revenue rocketed 206% year over year.
With a valuation of about 97 times trailing earnings, it may not seem too outlandish if you bet on continued growth at its current rate. Yet, remember that the semiconductor industry has a penchant for being cyclic. The appetite for chips that propel generative AI applications could eventually come crashing down. We just can’t predict when. If you purchase Nvidia at this inflated valuation and the market tumbles in the next year, you could end up nursing severe losses.
For those who missed the bus on Nvidia, stepping into the fray now involves more risk than they can stomach. If you yearn to align your portfolio with a major player in the AI revolution but with substantially less risk, consider purchasing shares of Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) now and holding onto them for the long haul.
Alphabet’s AI superiority goes beyond imagination
The AI fervor kicked off with the launch of ChatGPT by OpenAI approximately a year and a half ago. Nonetheless, Alphabet had already been championing the cause of AI for a number of years. In a 2016 blog post, Alphabet CEO Sundar Pichai proclaimed that “over the next 10 years, we will move toward a world that is AI-first, a world where computing becomes universally accessible.”
If not for a legion of engineers well-versed in the domain of machine learning, Google would not be able to discern incorrect spellings in search queries or rank search results effectively. With AI toiling behind the scenes, churning out enhanced outcomes, Google has captured a whopping 91.5% share of the global search market, as per Statcounter. In stark contrast, Microsoft, a titan in the tech space, having launched Bing almost 15 years back, only commands a 3.4% stake in the global search market.
Google Maps boasts over a billion monthly users, and multitudes of businesses eagerly utilize the platform to lure in new customers. Maps is yet another AI-intensive application; it wouldn’t be able to predict traffic or propose optimized routes devoid of the contributions from some of the AI industry’s most precious talent.
Why Alphabet is primed for AI’s ensuing chapter
In addition to a search business that outshines its competitors, Alphabet stands tall as a leading provider of cloud computing services. Towards the end of last year, its cloud offering gained additional heft with the arrival of Gemini.
OpenAI caught Alphabet off guard when it introduced ChatGPT in late 2022. To put it succinctly, Gemini offers a similar generative AI encounter for consumers through the chatbot once known as Bard. Gemini also grants enterprise-sized Google Cloud customers an opportunity to forge AI applications of their own.
Empowered with several applications boasting an excess of a billion active users per month, Google can provide enterprise-level cloud customers access to volumes of real-world data that they won’t find anywhere else.
Image source: Getty Images.
A fair valuation
Google Cloud sales surged 26% year over year in the third quarter. With a sprawling addressable market and an edge over rivals who do not hold sway over the markets for search and location data, investors can reasonably anticipate robust growth from its cloud business for another decade.
The lion’s share of Alphabet’s revenues and profits still stem from Google Services. This segment, although growing at a slower pace than its cloud business, is still a long way from hitting a plateau. Google Services revenue witnessed a 12.5% uptick year over year in the fourth quarter. Over the same period, operating income from the services segment leaped by a whopping 32%.
Once you consider the upper hand over the competition and the double-digit growth of its two primary operating segments, Alphabet should ideally command a lofty multiple on its earnings — which it currently does not. You can procure the stock for roughly 21 times forward earnings projections.
There’s no such thing as a risk-free growth stock. However, counting on dependable earnings from advertising and cloud services, investing in Alphabet at a reasonable valuation significantly enhances your prospects of emerging ahead in the long haul. Bundled with its firm grip on the rapidly evolving AI arena, it has the potential to become a top performer. Taking the plunge and snapping up some shares now for the long haul appears to be a smart move.
Should you invest $1,000 in Alphabet right now?
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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