Did Google Just Kill OpenAI and Become the Best AI Stock to Own Today?

Alphabet (GOOGL) has demonstrated a strong resurgence, with its Gemini AI, particularly the Nano Banana image editor, achieving viral success and temporarily surpassing ChatGPT in app store downloads, signaling a competitive shift in consumer AI tools. This AI momentum is complemented by robust performance across its core businesses, including Google Search revenue exceeding $50 billion and Google Cloud growing 32% year-over-year with over $50 billion in annual recurring revenue and 20%+ operating margins. Having recently surpassed a $3 trillion market cap, initiated a dividend, and continued share buybacks, Alphabet's P/E of 26 positions it as an attractive investment despite its valuation milestone.

Analysis

In 2023 and 2024, Wall Street left Google parent Alphabet (GOOG -0.04%) (GOOGL -0.14%) for dead (figuratively). The company was supposedly going to be disrupted by the new artificial intelligence (AI) chatbot called ChatGPT, which now has 700 million weekly and 190 million daily active users. Since then, Alphabet has gotten back on its feet. Revenue growth for Google Search hasn't skipped a beat, with the stock generating a return of 29% for shareholders year to date. Now, the company is pressing even harder on the accelerator pedal to compete with ChatGPT -- made by OpenAI -- as new tools are added to its Gemini AI. One that has gone viral is its imaging editing software called Nano Banana. As of this writing, Gemini is the most popular free app in the Apple App Store (based on downloads). Does that mean Alphabet just (figuratively) killed OpenAI by becoming the best AI stock to own today? Alphabet now has its own viral imaging service In late August, Alphabet began rolling out its new image editor for Google Gemini users on a selective basis. The imaging tool is a leap in capabilities from anything else out there today, allowing users to easily create new scenes with themselves, combine characters from images, or imagine completely new scenes. Its lifelike capabilities have driven viral usage of the product, with users making hundreds of millions of images already. The program's popularity has driven a huge boost in downloads for the Gemini mobile application. It recently surpassed ChatGPT to become the No. 1 downloaded application on Apple's App Store for several weeks (although it fell to No. 2 this week, behind a new video editing app from OpenAI called Sora). On Sept. 8, Alphabet announced that 23 million new users had already tried Gemini due to the Nano Banana imaging service. ChatGPT has significantly more users than Gemini: 190 million daily users compared to 35 million for Gemini as of the latest company updates. Now, it looks like Gemini may be gaining on OpenAI's flagship mobile application, and quickly. This doesn't mean that OpenAI or its ChatGPT app is dead. ChatGPT is now the third-most popular app on the App Store, and OpenAI's video-editing app is the new No. 1. But this may now be a three-horse race in consumer AI tools instead of a winner-takes-all scenario. This leapfrog in downloads has investors more excited about Alphabet stock. The company recently eclipsed a market cap of $3 trillion (it is currently worth $2.97 trillion), making it one of four stocks in history to surpass that valuation milestone. Alphabet is more than just Gemini It is nice to see Alphabet start to win in AI, which should be a relief for shareholders. But the company is more than just viral Gemini tools. Google Search revenue grew to over $50 billion last quarter. YouTube advertising does close to $10 billion in revenue every quarter. Google Cloud is growing like gangbusters and recently surpassed $50 billion in annual recurring revenue (ARR). The cloud may be the secret gem that drives Alphabet's growth over the next few years. It is growing revenue 32% year over year, and management still believes it is way behind the curve in getting data center capacity up for its clients. As the company budgets more for capital expenditures, that will lead to more revenue growth over the next three years. Plus, the segment is now doing $2.8 billion in quarterly operating income with margins of over 20%. Is Alphabet the best AI stock to buy? Alphabet is firing on all cylinders today. Gemini is going viral, while the company's moneymakers are posting consistent growth. Management is consistently returning cash to shareholders through buybacks and dividends. The company just started paying a dividend that yields 0.33%, while buybacks have brought the number of shares outstanding down 11% in the last five years. But is the stock cheap after surpassing a $3 trillion valuation? I still think it is. Alphabet has a price-to-earnings ratio (P/E) of 26 as of this writing, which is cheaper than most other "Magnificent Seven" stocks. With everything the company has going for it in the age of AI, combined with its capital returns program, the stock still looks like a good bet for investors for the rest of this decade. Alphabet has successfully shifted the market narrative from being an AI laggard to a formidable competitor, evidenced by its stock's 29% year-to-date return. The company's Gemini AI, particularly through its viral 'Nano Banana' imaging tool, has demonstrated significant market traction, attracting 23 million new users and briefly becoming the most downloaded application on Apple's App Store. While Gemini's 35 million daily active users still trail ChatGPT's 190 million, its rapid growth suggests the consumer AI landscape is evolving into a multi-participant race rather than a winner-takes-all market. This AI momentum is supported by exceptionally strong fundamentals across Alphabet's core businesses. Google Search revenue surpassed $50 billion last quarter, and more critically, Google Cloud has emerged as a major growth engine, expanding 32% year-over-year to exceed $50 billion in annual recurring revenue with operating margins now over 20%. The company's financial health is further underscored by its capital return policy, including an 11% reduction in shares outstanding over five years and a newly initiated dividend, all while maintaining a price-to-earnings ratio of 26, which is comparatively lower than many of its 'Magnificent Seven' peers.

Key Decisions for Investors

• Investors should assess Alphabet's valuation in the context of its robust fundamentals, particularly the 32% YoY growth and expanding profitability in Google Cloud, combined with a disciplined capital return program.
• Monitor Gemini's user growth and engagement metrics relative to competitors like OpenAI as a key performance indicator for Alphabet's ability to monetize its renewed innovation in the consumer AI sector.
• Acknowledge that while AI developments are a significant catalyst, the core advertising and cloud segments remain the primary drivers of financial performance and should be the foundation of any investment thesis.
• Consider the current P/E ratio of 26 as potentially attractive relative to peers, especially if the company can sustain momentum in both its AI initiatives and the high-margin cloud business.