If you want to invest in AI without losing sleep, buy Google Stock now

The race for artificial intelligence has divided the stock market into two camps. On the one hand, hardware manufacturers boast astronomical multipliers. On the other hand, a slew of startups that promise to disrupt the market are currently burning capital.

Investors looking for a windfall often forget Warren Buffett’s first principle of investing: “Never lose money.” If you’re looking for an asset that can participate in the technological development of artificial intelligence and still sleep soundly, Alphabet (GOOG) (GOOGL) looks like the most protected fortress on the market. Yes, this is one of the most expensive companies in the world in terms of capital. It probably won’t show the fastest multiple growth in the short term. But from the perspective of balancing risk and business model sustainability, Alphabet today is in a league of its own. And the underlying reason is:

Appropriate valuation and nature of profits: no room for bubbles

Currently, Alphabet’s P/E ratio is between 29 and 30 times, which is a very reasonable level. For technology leaders, this is a well-founded assessment. However, what is important here is not the numbers themselves, but the quality and structure of the earnings underlying this P/E ratio. Let’s compare the income characteristics of popular stocks in the current market.

Windfall profits are here and now. Today, many of the tech giants are showing cosmic slack due to temporary factors of bottlenecks and lack of equipment. Investors factor this margin into future periods, forgetting that the deficit will be eliminated sooner or later. The windfall may be corrected as soon as supply catches up with demand. Infrastructure overheating. Other players (e.g., in the e-commerce and cloud sectors) are extracting significant benefits from the drawbacks of cloud computing. If this deficit turns into a surplus, financial indicators will come under pressure.

Google has a fundamentally different story. Its earnings are classic, easy to understand, based on maximally reliable sources of income, and physically there are no signs of bubbles. Search advertising is sold according to standard market prices associated with real sectors of the economy and consumption. YouTube generates advertising and subscription revenue through regular organic fees. User subscriptions like Google One and YouTube Premium are stable, predictable recurring revenue (ARR) that doesn’t rely on AI hype. Alphabet has a cloud division (Google Cloud), but this is no big deal considering the size of this giant and the potential for cloud price fluctuations. The core framework of the company is protected from temporary fluctuations in the market. There is no room for these revenues to decline.

Absolute vertical integration and client access

Technology for technology’s sake does not produce profits. Ultimately, those who can bring this technology to billions of users without paying excessive fees to intermediaries will win. Unlike many players in the market, which have to rely on complex partnerships with language model creators or don’t have large ecosystems of their own, Google has a complete cycle, including chips and architecture. The company has been developing its own processors (TPUs) for years and pioneered the Transformer architecture, which has become the backbone of modern AI.

Alphabet also has direct access to consumers. Android, Chrome, YouTube, Google — they receive billions of touches every day. Google doesn’t have to find someone to sell its artificial intelligence to, it just integrates it into products that the world is already using every second.

Finally, Alphabet has a continuous flow of behavioral data that makes its AI models self-learning and unique.

Passed the “crash test”: resistance to overproduction of production capacity

I recently provided an in-depth analysis of the looming threat of data center market oversaturation. The AI ​​infrastructure market may face severe “crash tests” in the near future. If the technology sector’s huge capital expenditures lead to oversupply, the spot price of cloud computing will inevitably fall. For companies whose business models primarily rely on reselling or renting computing power to other businesses, this could be a huge hit to profit margins.

For Google, this scenario is simply not safe. It’s advantageous. Alphabet primarily builds infrastructure and data centers for itself. If the market’s computing costs were to drop several times over, the operational costs for searching, generating AI answers, and supporting YouTube could drop. That could hurt margins for purely infrastructure-related companies and increase the profitability of Google’s own final services.

Financial armor: Real cash defies expectations

Building AI infrastructure requires astronomical capital expenditures (Capex). Many companies are financing this construction at the expense of the bond market and the over-exaggerated expectations of investors. Google is funding its AI efforts with strong operating cash flow from its diversified advertising and services businesses. Real cold cash. It flows seamlessly into the company’s accounts. Even if the impact of AI on the market begins to subside and commercialization of the technology is slower than expected, Alphabet’s underlying business will not disappear. The company has more than enough margin of safety to stay in the game, continue with planned investments, and calmly ride out market turmoil.

summary

When you buy Alphabet at a multiple of around 30x, you’re not just getting the promise of a future AI revolution. You buy a super profitable company that is generating huge cash flows that are protected from infrastructure shocks. This is a way for shareholders to find themselves at the forefront of technological advances and to minimize the risks associated with overheating individual segments of the market. Reliability and profitability come at a high cost, but in times of macroeconomic storms, these are the very things that allow us to sleep peacefully.

On the date of publication, Mikhail Fedorov did not have (directly or indirectly) positions in any securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, please see the Barchart Disclosure Policy here.