Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) stock is flush with over $100 billion in cash and wisely investing chunks of it in artificial intelligence.
This is already benefiting the advertising and cloud computing arms of its business, as second quarter results have shown. The company still faces the risk that AI could disrupt its core search advertising cash cow.
However, Alphabet is taking the smart approach by embracing AI rather than fighting it. So far, this move is paying off.
Google Search remains the dominant online advertising platform despite AI chatbots like ChatGPT. Alphabet’s AI investments are even helping Search by improving relevance.
The second quarter also witnessed strong growth for YouTube and Google Cloud, both of which are using AI. With over $15 billion in subscription revenue driven partly by YouTube Premium and a cloud business surpassing $10 billion thanks to AI infrastructure, Alphabet has impressive momentum.
The company is poised to remain a long-term winner. Alphabet stock offers a nice mix of growth and value at current levels.
Its price-to-earnings ratio of just over 24 looks reasonable given its leadership position in digital advertising and enterprise cloud services. Both areas stand to benefit enormously from ongoing advances in artificial intelligence.
Alphabet Bets Big on AI, and Cash Pile Keeps Growing
Alphabet is funneling billions into artificial intelligence, and its huge cash stockpile just keeps expanding. The company spent $13 billion on capital expenditures last quarter, up from $6.9 billion a year earlier. This funded more data centers, custom AI chips called TPUs, and AI products like Gemini.
Google claimed its AI services for customers have already generated billions in new sales. Over 1.5 million developers now use Gemini too. Alphabet is truly bringing AI to the masses across Search, YouTube, Cloud, and its other products.
Project Astra at the recent I/O conference provided a glimpse into the helpful virtual assistant future. No wonder Alphabet feels emboldened enough to aggressively invest in AI despite concerns it could disrupt Search ads.
So far, those cash cows are still mooing happily along. Ruth Porat, CFO, said Alphabet remains “committed to creating investment capacity” for high-growth areas like AI. The strategy is paying dividends based on the strong second-quarter results.
AI investments likely helped drive the Cloud segment surpassing $10 billion in quarterly revenue for the first time.
Q2 Surge Confirms AI Fuels Alphabet’s Cash Machine
Alphabet’s second-quarter results provide hard proof its AI bets are paying off hugely. Total revenue grew 14% year-over-year to $85 billion. Strength came from Search, YouTube and Cloud – all areas making significant AI investments.
Cloud was the biggest surprise, surging over 29% to finally top $10 billion in quarterly revenue. It also delivered a 11% operating margin. AI infrastructure and solutions have already created billions for Cloud clients. Over 2 million developers now use those tools too.
Meanwhile, Search and YouTube kept minting money. Search grew 14%, while YouTube’s ad revenue popped 13%. Together, they accounted for over $64 billion in quarterly sales. These core advertising properties remain insulated from AI disruption for now.
Alphabet is also building a nice side hustle, with subscription services like YouTube Premium and Google One driving $15 billion in highly profitable annual recurring revenue.
Second quarter results confirmed AI presents a massive opportunity. With a solid runway for growth and protective network effects around Search and YouTube, Alphabet has barely scratched the surface of monetizing AI.
Alphabet Stock Worth Buying Before Next Surge
Alphabet sits well-positioned to keep benefiting enormously from ongoing AI advancements. While rivals race to leverage generative AI, Alphabet boasts unique advantages.
Its AI protects the wildly profitable Search and YouTube advertising cash cows rather than threatening them. Cloud, subscriptions, and other emerging segments also stand to gain.
With rock-solid leadership in digital advertising and cloud, Alphabet should deliver steady growth for years to come. Its AI investments demonstrate smart capital allocation to drive the next leg higher. At just over 24 times earnings, the stock looks fairly valued for a dominant industry leader.
Given the momentum from Q2 results, now appears a good time to start building a position. Alphabet seems poised to continue outpacing other “old tech” giants. Investors may want to nibble on dips rather than going all-in.
Looming recession risks could spur pullbacks. But long term, Alphabet’s diverse mix of AI-powered services should propel additional upside. For investors with appropriate time horizons, buying Alphabet stock today could yield impressive returns in the years ahead.
On the date of publication, Andrea van Schalkwyk held a long position in GOOGL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) and positions in the securities mentioned in this article.
