Alphabet Inc. just got a reminder of how important the perception of having a winning AI strategy is for investors.
The Google owner added $87 billion in market value in a single day last week after showing off the capabilities of its Gemini large language model, which it claims can rival OpenAI’s ChatGPT. To sustain those gains, Alphabet needs to show investors how prowess in that technology will translate into higher sales.
“The whole business model depends on getting this right,” said Gene Munster, co-founder and managing partner at Deepwater Asset Management, whose firm holds the stock. “If they can nail multi-modal generative AI, that will draw usage to Google, and that increased usage will protect and grow the search business.”
Alphabet has been dogged all year by concerns it has fallen behind Microsoft Corp. in the AI race. In recent months its shares have lagged behind its rival, which has been integrating OpenAI’s ChatGPT technology into its software and cloud products. The Gemini demonstration even drew criticism from employees saying it appeared to overstate the model’s current capabilities.
The third quarter earnings season seemed to underscore fears about Alphabet’s position, with Microsoft touting AI’s increasing impact on Azure growth while Google Cloud results disappointed. In the stock market, the gap between the two companies has widened, with Microsoft hitting a series of records this year. Alphabet remains about 12% below its all-time high in 2021.
Still, Alphabet’s demonstration of Gemini’s ability to generate both text and image-based responses to prompts went a long way in showing that the firm is still in the game. On Wednesday, Google unveiled Gemini Pro for businesses, allowing developers to build applications using the new AI model.
“The early look at Gemini suggests that the anticipated demise of Google’s AI ambitions have been vastly exaggerated,” said Neil Campling, Founding Partner at Chameleon Global Capital. “Investors are likely to revisit the stock when they see proof of incremental revenue growth coming through in cloud services and evidence of market share gains.”
Few dispute that Alphabet is a major player, given its years of investment and massive amounts of data, but it has struggled against the perception that it’s falling behind OpenAI.
Microsoft’s revenue is expected to grow at a slightly faster pace than Alphabet’s over the next few years, according to data compiled by Bloomberg. However, both are seen expanding at a double-digit pace — and Alphabet’s shares are far cheaper.
The stock trades below 19 times estimated earnings. This is well below Microsoft, at 31 times, as well as the Nasdaq 100 Index’s multiple of 25. In addition, while both Microsoft and the index are at a premium to their long-term averages, Alphabet is trading at a discount, suggesting room to expand.
“Clearly Microsoft is winning at this point in time. It has done a better job of communicating, of executing, of putting out actual products and having those contribute to growth,” said Chris Mack, global equity portfolio manager at Harding Loevner.
“There’s been a gap between what Alphabet is doing and the market’s perception,” he said. “The Gemini launch was it putting the market on notice that it is making AI front and center in its strategy.”
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The rally in Apple Inc., the world’s most valuable publicly traded company, is showing no signs of easing. After closing at a record high on Wednesday, the iPhone maker’s market value is approaching that of Europe’s largest stock market: France.
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Earnings Due Thursday
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