How AI momentum is 'powering' Alphabet’s stock

Key Concepts

• Tensor Processing Units (TPUs): Google's custom-designed chips for AI and machine learning tasks, aimed at reducing costs and improving efficiency.
• Gemini: Google's AI model, positioned as a competitor to OpenAI's ChatGPT.
• Waymo: Google's autonomous vehicle company, operating robo-taxis without safety drivers.
• Tesla's Full Self-Driving (FSD): Tesla's advanced driver-assistance system, which still requires safety drivers in its current iteration.
• Data for AI Training: The crucial role of vast amounts of data collected from real-world driving to train autonomous vehicle systems.
• Robo-taxi Safety Statistics: The statistical evidence suggesting robo-taxis have fewer accidents than human drivers, despite high-profile incidents.
• "Confidently Assertive" Driving: A recent reprogramming of Waymo vehicles to exhibit more assertive driving behaviors, mimicking human drivers.
• YouTube's Business Model: A free content platform with a revenue-sharing model for creators, making it a significant competitor in the streaming space.
• Alphabet's Valuation: The current stock valuation of Alphabet (Google's parent company) in relation to its earnings and compared to other "Mag 7" tech companies.
• Investment Strategies: Discussion on whether to sell winning stocks or hold them, and alternative investment opportunities.

Alphabet's Resurgence and AI Momentum

A year ago, Alphabet (Google's parent company) faced significant challenges, primarily due to the perceived threat of artificial intelligence to its core Google Search business. However, the company has since experienced a remarkable turnaround, now outperforming other major tech giants. This resurgence is attributed to several key factors:

1. AI Momentum and Gemini's Progress

• AI Chips (TPUs): While the exact technical function of Google's Tensor Processing Units (TPUs) is complex, they are recognized as crucial for enabling Google to perform AI tasks more cheaply and effectively. This internal advantage allows them to develop and deploy AI more efficiently.
• Gemini vs. ChatGPT: Google's AI model, Gemini, has been making significant gains and is performing competitively against OpenAI's ChatGPT. This progress in AI development is a major driver of investor confidence.
• Cost Efficiency: TPUs are not necessarily about replacing Nvidia's chips entirely but about reducing the cost of AI computation for Google. This is a strategic advantage, especially as other companies like Amazon are also developing their own AI-specific hardware (e.g., "adamantium xxmenium").

2. Basic Business Execution and Earnings Growth

• Double-Digit Earnings Growth: Alphabet has demonstrated consistent double-digit earnings growth, both this year and last. This indicates strong operational performance and profitability.
• Fading Fears: The period of "peak fear" a year ago, driven by concerns about AI disruption and potential government antitrust actions, has subsided. This has led to a more favorable market perception and a re-rating of the stock.

3. Valuation and Investment Perspective

• Past Recommendation: Al Root of Barron's had recommended buying Alphabet a year ago, and the stock has since risen by 95%.
• Current Valuation: While the stock is no longer as "attractive" as it was, it is trading at approximately 27-28 times earnings. This is considered "middle of the pack" for a "Mag 7" company, especially given its accelerating AI momentum and earnings growth.
• Holding Winners: The argument is made that there's no reason to sell a winning stock simply because it has appreciated significantly.
• Alternative Investments: Some panelists suggest that while Alphabet is a solid performer, other out-of-favor stocks like Amazon or Meta might offer better relative value at present.

Waymo's Autonomous Vehicle Race

The discussion also delved into the competitive landscape of autonomous vehicles, specifically comparing Waymo and Tesla.

1. Waymo's Lead in Robo-Taxis

• Driverless Operations: Waymo has a clear lead in operating fully autonomous robo-taxis without safety drivers. These vehicles are described as "lovely."
• Accident Statistics: Despite a tragic incident involving a cat, Waymo robo-taxis have statistically shown 91% fewer accidents than human drivers.
• The "10x Better" Standard: Drawing on the perspective of Dar at Uber, the consensus is that robo-taxis need to be "10 times better" than human drivers to overcome public skepticism and the impact of negative incidents. This ambitious target, if achieved, could theoretically save tens of thousands of lives annually.

2. Tesla's Approach and Data Advantage

• Manufacturing Scale: Tesla's significant advantage lies in its ability to manufacture millions of cars annually.
• Data Collection: The vast number of Teslas on the road provides an immense dataset for training their autonomous driving systems. This real-world data is crucial for improving self-driving capabilities.
• Ongoing Competition: While Waymo has a lead in driverless operations, Tesla's data advantage means they are not out of the race.

3. Public Perception and Future of Robo-Taxis

• Human Skepticism: Some individuals, like Andrew, remain "old school" and prefer having a human driver, expressing skepticism about the current capabilities of autonomous systems.
• Evolving Driving Behavior: Waymo vehicles are reportedly being reprogrammed to exhibit more "confidently assertive" driving behaviors, moving away from their previous overly cautious approach. This includes actions like cutting people off and making illegal U-turns, which are seen as mimicking human city driving.
• Maturity Indicator: A humorous, albeit concerning, benchmark for the maturity of the technology is suggested: when a robo-cab gives a pedestrian the finger while speeding past.

YouTube's Dominance in Streaming

The conversation also touched upon the competitive landscape of streaming services, with YouTube being highlighted as a significant disruptor.

• Underestimated Power: YouTube is considered an underestimated force in the streaming wars, particularly by younger generations like the son of one of the panelists.
• Free Content and Creator Economy: The platform's core appeal is its free content model. It also fosters a creator economy where successful content creators can share in the revenue generated.
• Valuation Potential: If YouTube were a standalone public company, it is estimated to be worth around $500 billion, underscoring its immense value and reach.

Investment Outlook for Alphabet and Other Tech Giants

The panel concluded with a discussion on investment strategies and the current market for tech stocks.

• Alphabet's Position: Despite its strong performance, Alphabet is still considered a viable investment, trading at a reasonable valuation compared to its peers.
• "Mag 7" Comparison: Alphabet's valuation (around 27-28 times earnings) is compared favorably to Microsoft (28 times) and Apple (33 times), and Broadcom (29 times).
• "Easy Money" Made: One perspective is that the "easy money" has already been made on Alphabet, and investors might find better relative value in out-of-favor stocks like Amazon or Meta.
• IPO Concerns: There's a mention of some initial public offerings (IPOs) "going up in flames," suggesting caution in the current market for new listings.