Artificial intelligence (AI) and quantum computing investing are two incredibly popular trends. While the applications of these two technologies could intersect, the companies involved with each sector often do not. However, one company is recognized as a leader in both fields, and its stock is incredibly cheap right now.
The company? None other than Google parent Alphabet (GOOG 1.16%) (GOOGL 1.13%). Alphabet has significant investments in both fields and is a smart way to play both trends while also cashing in on its existing business. This combination of a rock-solid core business and strong potential for upside makes Alphabet an incredibly smart investment pick.
Alphabet has multiple growth opportunities, all fueled by advertising dominance
First, let's talk about Alphabet's core business: 75% of the revenue Alphabet brings through the door comes from advertising on its various platforms, like the Google search engine and YouTube. While this is a mature business, it's constantly evolving to include the latest generative AI technology that Alphabet is developing.
Mentioning generative AI, Alphabet has Google Gemini, which is seen as one of the top options in the space. While it hasn't gotten near the fanfare as ChatGPT, it's likely used more often, as it provides an AI-powered summary of search results every time you perform a Google search. It also helps advertisers make ads quicker and more effective, and it gives advertisers the power to tailor the ad to each consumer. As a result, Gemini may be the most integrated generative AI platform available.
Another segment benefiting from Gemini's prowess is Google Cloud. Google Cloud is Alphabet's cloud computing segment and provides its clients with the computing power and development tools they need to develop, train, and run their AI models. Google Cloud has seen explosive growth recently, with revenue rising 35% in Q3. This is an important segment for Alphabet, as it is by far the most promising growth sector for the company.
Lastly, Alphabet kicked off the quantum computing investment interest in December 2024 when it announced its Willow quantum computing chip had accurately completed a calculation that would take the world's fastest supercomputer 10 septillion (10 with 25 more zeros behind it) years to complete.
The biggest problem quantum computing businesses face today is that quantum computing isn't inherently error-free. However, Alphabet figured out a way to substantially reduce errors with its Willow chip, and it got investors excited that a quantum computing breakthrough was near. However, investors need to be a bit more patient.
Alphabet provided this useful chart to convey how useful the test it completed was.
Data source: Google.
Although this test was incredibly difficult, it has no functional meaning. Now, the work begins to become commercially relevant, which may be some time away. At CES, Nvidia CEO Jensen Huang stated that he believed useful quantum computing was still 15 years away. If he's right, investing in a company like Alphabet for quantum computing is the smart move, as it has other businesses like advertising and AI that will continue making investors money while quantum computing technology develops.
This is the main reason why Alphabet is a top pick in the quantum computing space for me, as winning the quantum computing race isn't a requirement for Alphabet's stock to succeed, although it would be a huge boost if it did.
Still, Alphabet's base business is strong and priced incredibly cheap right now.
Alphabet's stock is cheaper than the S&P 500 right now
Alphabet's stock doesn't have a premium valuation attached to it, as it trades for less than the broader market right now, as measured by the S&P 500 (^GSPC -0.29%).
GOOGL PE Ratio (Forward) data by YCharts
Alphabet is cheaper at 22.1 times forward earnings than the S&P 500's 22.6 times forward earnings. Although those numbers aren't that far from each other, the market message is clear: Alphabet is an average company.
Considering Alphabet's strong core business, Google Cloud growth, and the tailwinds of AI and quantum computing, this seems like an erroneous statement. As a result, I think investors have a once-in-a-decade opportunity to scoop up Alphabet shares at a cheap valuation and hold them for a long time as the AI and quantum computing megatrends unfold.
