4 Reasons to Buy Alphabet Stock and 2 Reasons to Sell

Digital advertising company Alphabet's (GOOG -0.75%) (GOOGL -0.77%) highly influential brands such as Google, YouTube, Google Cloud, and Chrome are being used extensively by billions of users. With its stellar ecosystem of products and services, Alphabet enjoys access to mounds of valuable data. This data has also played a major role in helping Alphabet build its AI capabilities over the past decade.

However, all is not rosy for the company. While there are a few reasons to like the stock, there are at least two that have investors worried.

Strength in the core digital advertising business

Google accounted for nearly 83.5% of the global desktop search engine market in July 2023, lower than the 84% share in July 2022. On the other hand, the second-leading search player Microsoft Bing's share has increased from 8.8% in July 2022 to 9.2% in July 2023.

While some analysts find the trend worrisome, all is not lost. Google is still a leader in the global digital advertising market with a revenue share of around 39%. Thanks to Alphabet's ability to effectively and efficiently deliver targeted advertisements to users, Google and YouTube continue to attract advertisers. In the third quarter, strength in the retail vertical drove up advertising revenue for the Google search engine, while brand and direct response advertising was a major catalyst for the YouTube platform.

AI-powered improvements in the advertising business

Alphabet has launched a feature called Search Generative Experience (SGE), which integrates generative artificial intelligence (AI) into the Google search engine to provide contextual, natural, and intuitive responses. The company is also experimenting with integrating its recently launched and most advanced Gemini large language model (LLM) in SGE. The AI-driven results are expected to help improve user experience and advertisers' performance and profitability. Innovations such as conversational capabilities in Google Ads, new campaign types, and new ad formats will further enable advertisers to reach new potential customers. This can help expand Alphabet's advertiser base as well as its revenue potential.

Gemini variants for different use cases

Alphabet is also leveraging advanced AI and machine learning technologies to drive innovation and efficiency across industries such as finance, healthcare, retail, and transportation. To ensure optimal and cost-effective use of computational and financial resources, the company has introduced Gemini LLM in three variants: Nano, Pro, and Ultra. While Nano is optimized for on-device tasks, the Pro version is used for a range of scalable tasks. Gemini Ultra is being developed for large and highly complex tasks. All these initiatives imply that Gemini may prove to be a tough competition to OpenAI's ChatGPT.

Opportunities in Google Cloud business

Alphabet's AI initiatives will also boost the already robust Google Cloud business. In the third quarter, Google Cloud's revenue was up 22% year over year to $8.4 billion, driven by rising demand for its portfolio of infrastructure, data analytics, AI, collaboration, and productivity solutions. The company's focus on hybrid and multicloud environments has also been a major positive for customers keen on seamlessly integrating Google Cloud services with on-premise infrastructure and other cloud providers. Integration of the Gemini Pro model with Google Cloud is also expected to boost demand for Google Cloud Platform services.

Risks to consider

Many analysts have been voicing worries about the viability of the company's core search-driven advertising business in the wake of the increasing popularity of the Bing search engine. While this risk cannot be ignored, Alphabet is working hard to catch up with Microsoft in the AI game.

Although Gemini's public debut was imperfect, its multimodality (ability to understand and handle multiple data types such as text, images, audio, and video) can emerge as a tangible benefit over OpenAI's models such as GPT-3.5 and GPT-4. The model will have multiple real-world use cases in consumer and enterprise segments. As the use of the Gemini model through SGE and Bard continues to grow, there will be a significant increase in ad performance. This can help Alphabet safeguard its leadership position in the digital advertising space.

The recent legal defeat against Epic Games is also seen as a challenge to Alphabet's Play app store business. This case may also open a Pandora's box for Alphabet, driving many more game developers to challenge Alphabet's dominance and potentially anticompetitive behavior in the gaming landscape. While this is a possibility, the situation has not yet materialized.

Against the backdrop of the many growth drivers and a manageable risk profile, Alphabet seems to be a compelling pick for 2024 and beyond.