1 Artificial Intelligence (AI) Growth Stock With More Upside Than Nvidia to Buy Now, According to Wall Street | The Motley Fool

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Wall Street analysts see more upside in Alphabet than Nvidia over the next 12 months.

Some analysts have called artificial intelligence (AI) the fourth industrial revolution, citing its potential to improve productivity and efficiency with predictive insights and automation. Similar to the third industrial revolution — which was driven by digital technologies like the internet, computers, and mobile devices — AI could create substantial wealth for well-positioned investors.

If AI has revolutionary potential, many investors view Nvidia as the best AI stock to take advantage of it. That bullish sentiment is understandable. Nvidia dominates the market for machine learning processors, and the company has extended its data center focus by branching into networking equipment, subscription software, and cloud services. But Wall Street analysts see more upside in another AI stock.

Specifically, Alphabet (GOOGL 1.00%) (GOOG 0.87%) carries a consensus price target of $164.50 per share, implying a 15% upside from its current price. That tops the 6% downside implied by Nvidia’s consensus price target of $650 per share. Of course, investors need not choose. The most prudent course of action is to build a basket of AI stocks.

Here’s what investors should know about Alphabet.

Alphabet reported good results in the fourth quarter, beating expectations on the top and bottom lines. Revenue increased 13% year over year to $86.3 billion on particularly strong momentum in the Google Cloud and Google subscriptions, platforms, and devices segments. The former comprises cloud services and the latter includes YouTube TV subscriptions, app store downloads, and Pixel devices.

Despite that strong performance, the stock declined following the report due to weaker-than-expected results in Google advertising. Wall Street analysts had anticipated 12% sales growth. Alphabet narrowly missed that projection. However, GAAP net income still soared 52% to $20.7 billion as its operating margin expanded 350 basis points due to cost-control efforts.

The chart below shows fourth-quarter revenue growth across Alphabet’s four primary business segments.

Alphabet subsidiary Google is the largest advertising company in the world. It accounted for 28.1% of digital ad spending last year. Admittedly, competitors like Amazon and TikTok parent ByteDance are gaining ground, but Google is expected to capture 26.9% market share in 2025, according to Insider Intelligence. That estimate puts the company about 5 percentage points ahead of its closest competitor, Meta Platforms.

Google’s success in digital advertising is primarily due to its ownership of popular platforms like Google Search, YouTube, Chrome, and Android. They let the company engage users and source consumer data from across the internet. Advertisers find that compelling. But Google also has expertise in big data and machine learning (ML) algorithms, especially as they relate to internet search. The company uses that technical know-how to improve ad campaign performance for advertisers.

Additionally, Google has stayed on the cutting edge of ad tech through consistent innovation. For instance, the company recently debuted Search Generative Experience (SGE), a tool that supercharges Google Search with generative artificial intelligence (AI) to help users understand topics more quickly. SGE could further cement Google’s status as the leading internet search engine, a noteworthy outcome given that search advertising is the largest segment of the broader digital ad market.

Google Cloud includes revenue from Google Workspace software and Google Cloud Platform (GCP) services. Alphabet has a reasonable foothold in both spaces, though it trails Microsoft and Amazon. Specifically, Google Workspace accounts for about 10% of productivity software sales, while Microsoft 365 accounts for 90%. GCP lays claim to about 11% of cloud infrastructure and platform services sales, while Amazon Web Services takes 31% and Microsoft Azure has 24%.

However, GCP increased its market share by 2 percentage points over the last two years, and those gains could continue as the company leans into AI. One important development is the recent launch of its multimodal model Gemini, which reportedly rivals OpenAI’s GPT-4 model. Customers can use Gemini to build generative AI applications that span multiple media formats, including text, images, video, and code.

Google also debuted Duet AI last year. Duet AI is a generative AI companion that automates various tasks across Workspace applications. It can draft text in Google Docs, organize data in Google Sheets, and make presentations in Google Slides. Innovations like Gemini and Duet AI could bring more customers to Google Cloud, helping the company gain (or at least maintain) market share in productivity software and cloud services.

Statista says digital ad spending will increase by 7% annually through 2028, and Grand View Research believes the cloud computing market will compound by 14% per year through 2030. That gives Alphabet a good shot at double-digit sales growth for the foreseeable future.

Indeed, Wall Street expects 10% annual sales growth over the next five years. That consensus estimate makes its present valuation of 6 times sales seem reasonable, and that multiple is a slight discount to the three-year average of 6.5 times sales. Investors with a five-year time horizon should feel comfortable buying a few shares of Alphabet today, especially in the context of a broader basket of AI stocks.

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