It is impossible to predict the future of the stock market. However, certain patterns tend to repeat over time. For example, since 1971 the NASDAQ Composite has surged an average of 19% every year following a bear market rebound like the one we experienced in 2023. If that pattern holds, investors could be on the cusp of another bull run.
Let's explore why the tech giant Alphabet (GOOG -0.75%) (GOOGL -0.77%) could be a great way to bet on a continued market rally, especially as it invests in new growth opportunities related to generative artificial intelligence (AI).
Fresh off a massive stock split
In July 2022, Alphabet completed a massive 20-for-one stock split that took its stock price to around $110 per share. The move came at a difficult time for the company as rising interest rates and fears of a U.S. recession put a damper on the digital advertising industry, which makes up roughly 80% of its revenue. The good news is that these macroeconomic issues could fade as inflation falls and the market becomes more optimistic that the Federal Reserve will ease its hawkish monetary policy.
While Google's economic moat in internet search remains rock-solid thanks to its strong algorithm and network effects, the company is also exploring new growth drivers that could help diversify its business. AI seems to be one of its most promising opportunities.
The generative AI opportunity
When the generative AI chatbot ChatGPT hit the scene in 2022, it looked like a Google killer because of its ability to answer user questions in an informative and conversational way. But the threat was overblown.
Alphabet quickly released its own AI capabilities through Bard and Google search AI, which benefit from its treasure trove of data and ability to search the internet in real time. The company successfully shored up its economic moat in internet search, while also creating more opportunities to collect valuable user data. But its enterprise-focused efforts might have an even bigger impact.
Image source: Getty Images.
In December, Alphabet launched Gemini, its most powerful AI model, which will power its consumer-facing apps and be licensed to Google Cloud customers who want to build their own applications. This model could have use cases ranging from customer service bots to product recommendations and text summaries. Google is also investing in proprietary AI hardware, such as its next-generation TPU v5p chip, designed to be a cost-effective way to train AI models.
All in all, Alphabet's AI efforts could generate growth and help the company diversify its business model away from just digital advertising.
A very affordable valuation
Alphabet is a massive blue-chip company, so investors shouldn't expect it to post an earth-shattering growth rate going forward. With that said, its stock is very affordable from a valuation perspective.
With a forward price-to-earnings (P/E) multiple of 21, shares trade at a sharp discount to the NASDAQ average of 29. This makes Alphabet shares a great way for value-oriented investors to bet on a bull market in 2024 as its new AI growth drivers scale up and macroeconomic challenges like high interest rates ease.
