Alphabet stock (NASDAQ:GOOG, NASDAQ:GOOGL), the owner of the popular search engine Google, is amongst the leading companies in the global tech industry in the areas of online advertising, cloud computing and artificial intelligence. 

While the firm is operating in a world that is characterized by heightened legal risks and intensified competition, its capacity to innovate new products is a critical source of sustainable value. The strong positions of Alphabet in AI, and the right steps in the development of new markets, such as quantum computing and self-driven cars, make it a promising investment. However, many short-term concerns must be taken into account while the long-term view of the company remains accretive.

Based on the above factors, I think that Alphabet is a buy, even when discounting the risks involved. This article will develop my thesis as well as touch on the hold and sell case for Alphabet stock.

Dominance and Innovation Drive Alphabet’s Growth Potential

Despite rising threats from Microsoft’s (NASDAQ:MSFT) Bing and OpenAI’s experimental SearchGPT feature, Google is still one of the leaders in market share in the sphere of online advertising. Google continues to lead the market and has an 81% stake in searches in the global market. Also, it operates the largest email service with Gmail and the largest video-sharing platform with YouTube.

Although Google’s dominance has slipped from 88% in 2015, namely due to being late to the generative AI integration compared with Bing, it is expanding its presence with its AI overviews. My view is that a future Google product will become more closely tied to its Gemini large language model over time. As of today, these products remain distinctively separate, but the lines could blur with Gemini integrating into its Google Assistant and YouTube product features.

Due to the importance of Google to its advertising business, generating over 80% of its earnings for the company, Alphabet will be throwing all of its resources into generative AI and Gemini to take back its lost ground. Its continued survival depends on the popularity of its Google product, and although it is currently playing catch up, it has decades’ worth of ingrained user behavior to fall back on.

Regulatory and Competitive Challenges Could Limit Alphabet’s Growth

There are some risks to Alphastock’s search business as regulations on AI and big tech heats up. As I mentioned in a previous article, it has faced legal challenges in Europe where 32 media companies have accused Google of abusing its market dominance and ad tech practices. The recent focus on Alphabet has been through the European Union’s Digital Markets Act which has led to investigations into its alleged anti-competitive practices, particularly in app stores and search results. Thus, the E.U. regulators are acting with a stronger determination to bring big tech companies like Alphabet in line.

Then there’s the unignorable rise of Bing, which has steadily gained market share over Google. In 2018, it had just a 3.82% market share, today it has a 10.51% share. Google’s traffic is in a downwards sloping trend, while Bing was able to capitalize on Alphabet’s slow start to the AI race, absorbing tens of millions of users in the process.

Valuation

The current Alphabet stock valuation looks attractive at its price point. The company trades at a slight premium to its price-to-earnings growth rate ratio of 1.2. This suggests that Alphabet’s earnings growth may not fully justify its current valuation, especially if regulatory challenges or economic headwinds materialize.

The company’s stock price has pulled back after gaining 25.89% over the past year, with buyers recently able to find support at the $160 psychological level, bouncing to $163.84 at the time of writing. The options market has shown relatively little interest in the stock in the short-term with its implied volatility being well below average. It is therefore not predicted to move quickly in either direction.

For long-term investors my recommendation is to buy, as it has corrected after its all-time high peak of $191, yielding a discount. More buying interest may come in the short term if it’s able to continue its convincingly hold above resistance at $165, which it has struggled to do over the past five days.

On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.