This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
The S&P 500 index is market-cap-weighted, meaning companies that do well slowly make up more of the index over time. In recent years, a group of prominent technology companies dubbed the "Magnificent Seven" have dominated headlines and increasingly influenced the broader market.
A research article by The Motley Fool notes that the Magnificent Seven stocks -- Apple, Microsoft, Amazon, Google parent Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), Facebook parent Meta Platforms, Nvidia, and Tesla -- accounted for approximately 12.3% of the S&P 500 in 2015, but that had increased to 35.4% at the end of 2024.
Alphabet, in particular, has been an AI leader among the group, with multiple pieces of its business benefiting from growth opportunities in artificial intelligence (AI). But in recent weeks, market turbulence has knocked the stock down roughly 20% off its all-time high.
Should investors buy this dip, or should they avoid Alphabet? Here is what you need to know.
AI hasn't meaningfully threatened Alphabet's golden goose
Digital advertising on Google Search has been Alphabet's highly profitable core business for years. People worldwide use Google for roughly 90% of their internet searches. Some worry that large language models, like ChatGPT, could take search traffic away from Google Search because these models can summarize information in response to queries rather than simply present page links.
Alphabet has integrated its large language model and AI summaries into Google, but some fear this shift to AI models could reduce advertising revenue. Thus far, this isn't apparent in the numbers. Google Search generated $42.6 billion in revenue in Q4 2022, right before ChatGPT became popular in early 2023. Google Search revenue was $54 billion in Q4 2024. In other words, revenue grew nearly 27% over two years. That doesn't look like a business feeling pressure or disruption from AI.
That could still change, but it seems that Google Search's demise due to AI is grossly exaggerated for now.
The company has immense growth potential outside of advertising
Meanwhile, Alphabet has multiple long-term growth catalysts centered around AI innovation.
Google Cloud is the world's third-leading cloud computing platform -- trailing No. 1 and No. 2 at about 12% of the market -- and is poised to benefit from increased demand as businesses use AI applications through the cloud. Google Cloud's Q4 2024 revenue was approximately $12 billion, a 30% increase year over year. Alphabet noted on the earnings call with analysts that capacity constraints have bottlenecked Google Cloud's growth.
The market seems worried that management is ramping up data center investments in 2025, but it's arguably money well spent if the demand is there. Analysts at Goldman Sachs believe AI will drive 22% annualized growth in cloud revenue through 2030, taking the market to $2 trillion.
Alphabet offers cloud-based AI products, including large language models, speech-to-text, and language technology, and tools to build and deploy virtual agents. It also recently announced its agreement to buy Wiz for $32 billion in cash to bolster its cloud security offerings.
Lastly, the market could be overlooking Alphabet's leadership in autonomous driving. Tesla may get attention for its efforts to launch a self-driving fleet, but Alphabet's Waymo is already there and rapidly expanding its footprint. Waymo provides autonomous rides in several U.S. cities and ramped up from 150,000 weekly rides at the end of 2024 to 200,000 by the end of February 2025:
Google (excluding Cloud) contributed $84 billion to Alphabet's $96 billion total revenue in Q4 2024. Opportunities in the cloud and autonomous driving haven't moved the needle much yet, but could become a bigger story over the next decade and beyond.
Alphabet's recent slide creates a compelling buying opportunity
Considering Alphabet stock is down 20% off its high while the Nasdaq Composite is down just 12% in that one-year span, market sentiment toward the stock seems lukewarm at best right now. The superpower for long-term investors is the ability to buy high-quality companies when prices fall and hold them while earnings grow, eventually lifting the stock.
Remember, business performance eventually has the loudest say in how stocks perform. Alphabet seems to have a bright future, and analysts estimate the company will grow earnings by an average of 16% annually over the long term. Meanwhile, the stock's price-to-earnings ratio (20) values it at a PEG ratio of 1.25, which fits my parameters of excellent value for expected growth.
Alphabet is a great deal today, barring something going very wrong in the business.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
