Alphabet: AI Value Stock?

Some AI stocks have seen substantial gains recently, but that doesn't mean all AI stocks are overpriced. Alphabet, Google's parent company, may be a surprising AI value play. Alphabet has used AI in its applications since 2001 and was once considered a leading AI stock. Currently, it has a P/E ratio of around 19, making it the cheapest stock in the "Magnificent Seven" and potentially a value stock.

The uncertainty surrounding Alphabet may explain its low valuation. The emergence of OpenAI's ChatGPT seemed to catch Alphabet off guard, and despite launching Google Gemini, Alphabet appears to be lagging behind. ChatGPT also poses a challenge to Google Search because it provides information compiled from various sites, reducing the need for users to visit those sites and potentially undermining Alphabet's advertising-based revenue model. Google Search's market share has fallen below 90% for the first time in years, according to Oberlo. In the first quarter of 2025, 74% of Alphabet's revenue still came from advertising, which could be a negative trend.

However, Alphabet is working to decrease its reliance on advertising. Advertising accounted for 77% of overall revenue in the year-ago quarter, but that percentage has decreased even as ad revenue grew by 8%. Google Cloud now accounts for almost 14% of the company's revenue. Alphabet also owns other businesses, such as Verily Life Sciences, Google DeepMind, and Fitbit. Waymo, the autonomous driving company, is one Alphabet-owned enterprise showing promise. A recent funding round valued Waymo at $45 billion, suggesting it could become a significant revenue source.

Alphabet is also investing heavily in itself, pledging $75 billion in capital expenditures in 2025. It has $95 billion in liquidity and generated $75 billion in free cash flow over the previous 12 months. This allows it to invest in improving its AI technology and compete in other tech areas. Given Alphabet's low P/E ratio and substantial resources, investors may want to consider adding shares. While ChatGPT's rise puts pressure on its advertising business, Alphabet is investing heavily to improve its AI capabilities and develop new revenue streams like Waymo. Its ability to fund itself should give investors confidence in its future. If Alphabet enhances its AI and successfully develops new revenue sources, investors may be glad they bought the stock while it was still a value.