In 2023, there was one clear-cut AI winner among software-focused big tech plays, and it wasn’t Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) stock. Microsoft (through its partnership with OpenAI) had the edge in the generative AI space, but GOOG has played some serious catchup in recent months.
As a result, GOOG shares have surged. Although MSFT stock has outperformed year-to-date (up around 58%), GOOG isn’t far behind, as it has rallied 53.9% during this same time frame. Better yet, another year of strong performance may lie ahead. At least, when considering a trio of reasons related to valuation, growth, and the company’s AI catalysts.
GOOG Stock: The Role of ‘AI Catch Up’ in its 2023 Surge
Progress in generative AI has not been the sole reason Alphabet shares have surged in 2023. A rebound in digital advertising demand has played a big role. So too, has the impact of cost reduction efforts on the company’s bottom line.
Still, I wouldn’t discount how advances with Alphabet’s Bard AI chatbot platform have been a factor in sending GOOG stock (trading for as low as $85.57 per share earlier this year) back to prices nearing $140 per share. As I discussed recently, since the poorly received launch of Bard last February, the platform has seemingly regained its footing.
Non-AI factors, not AI progress, have contributed to Alphabet’s improved fiscal results. However, starting next year, generative AI could do much more than merely boost enthusiasm for the stock. Much like with the frontrunner Microsoft, AI could affect the company’s bottom line.
Three Reasons Shares Could Rally 50% Again
Following a 50%-plus surge for GOOG stock so far this year, some may be skeptical that another such surge will happen in 2024. However, it may be possible, for three reasons.
First, while Alphabet stock has benefited from multiple expansion, there’s room for a further re-rating. Trading for 24 times forward earnings, GOOG continues to trade at a sharp discount to MSFT. MSFT has a forward earnings multiple of about 33.8. Now, I’m not saying that GOOG can easily close this valuation gap, but it could narrow it considerably.
Second, per sell-side estimates, earnings per share for Alphabet could rise 16.35% in the coming year. With shares likely to move up in tandem with earnings growth, it may not take as much additional multiple expansion to push shares up by another 50% over the next twelve months.
Third, Alphabet could unveil some major news about its AI commercialization prospects in the year ahead. As Reuters reported earlier this month, the company has an AI product in the works that it says could one day have a user base in the billions. More news of this nature will likely provide a lift for the stock as well.
The Verdict
Given the aforementioned factors, another high double-digit rally is well within reach for Alphabet shares over the next twelve months.
Still, it’s not set in stone that this stock experiences yet another banner year, in terms of share price performance. For now, Microsoft is still the frontrunner in generative AI. Any sort of AI-related stumble on Alphabet’s part could lead to a serious sell-off for GOOG.
That said, considering the improving results with Alphabet’s existing non-AI businesses, alongside a valuation that remains reasonable, there may be enough else in play to mitigate downside risk in the event this happens.
Hence, as I’ve stated previously, if you’re looking to spread your bets widely, by owning AI plays besides MSFT, feel free to enter/add to a GOOG stock position.
GOOG stock earns a B rating in Portfolio Grader.
— Louis Navellier and the Investor Place Research Staff
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Source: Investor Place