Everybody and their uncle assumes that Google and YouTube parent company Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) will lose to Microsoft (NASDAQ:MSFT) in the artificial intelligence ( ) arms race. However, assumptions are often proven wrong in the financial markets. Just maybe, GOOG stock can stage a powerful comeback and investors will regret it if they just cut and run.
Even the mightiest companies must face bad quarters and even bad years sometimes. That’s the challenge of being No. 1 in the search engine business: Google will also face fierce competition from Microsoft and others.
Don’t assume that Alphabet’s fall from grace is a foregone conclusion, though. If unfavorable headlines caused some folks to sell their Alphabet shares, then it’s time for value hunters to ignore the fearmongers and consider a contrarian position.
What’s Happening With GOOG Stock?
Now that GOOG stock is far below its November 2021 peak of around $150, this is an opportunity to assess whether there’s a good value here. A couple of old-fashioned valuation metrics ought to shed some light on this topic.
Alphabet has a price-to-earnings (P/E) ratio of 20.5x, and my ears typically perk up whenever mega-cap tech names approach 20x. Furthermore, Alphabet’s price-to-sales (P/S) ratio of 2x is enticing. Usually, I find a P/S ratio under 5x to be acceptable, and anything below 2x is probably a strong value.
Meanwhile, investors are so hyperfocused on AI that they’re ignoring an important development. According to the Financial Times, Google just “claimed a breakthrough in correcting for the errors that are inherent in today’s quantum computers.” There’s no need to get into geeky tech explanations now. Just know that this represents a significant step forward in building a “practical quantum computer.”
Google Could Be a Long-Term Contender in the Generative AI Space
In other words, Alphabet is still a tech innovator. You don’t have to let the chatter of skittish traders confuse you. Just because Microsoft has an early lead in conversational AI, doesn’t mean you have to own MSFT stock but not GOOG stock; it’s perfectly fine to have both stocks in your portfolio.
The generative AI competition is still in its early innings. Granted, Google’s AI event wasn’t a huge success. Yet, financial traders have already priced their disappointment into Alphabet shares.
Most likely, disappointment is already baked into GOOG stock because of Microsoft’s early lead in generative AI. That’s not necessarily a bad thing. Low expectations could actually provide a setup for a positive surprise later on.
In the meantime, Alphabet is reaffirming its commitment to cost-cutting with another round of layoffs. Prospective investors can take a glass-half-full view of this development, as a slimmer Alphabet may be able to deliver stronger bottom-line results in the coming quarters.
So, Is it Too Soon to Write Off Alphabet and GOOG Stock?
Alphabet has a lot of proving to do in 2023 and beyond. Hopefully, the company can improve its conversational AI capabilities with Bard or other platforms.
If Alphabet can achieve this, GOOG stock may be poised for a powerful comeback. Therefore, value seekers who aren’t averse to risk can consider a small position in Alphabet shares.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.