Alphabet and Oracle have more room to run.
The U.S. stock market has seen multiple ups and downs in the past decade. While trends such as e-commerce, blockchain, cryptocurrency, cannabis, and cloud computing have influenced the market, none may have as far-reaching effects as the artificial intelligence (AI) trend. According to a forecast from Statista, the global AI market could grow at a compound annual rate of 28.46% from $184 billion in 2024 to $826.7 billion in 2030.
Not surprisingly, the AI exposure of many companies has driven their stocks to dizzying highs. However, some AI-powered stocks such as Alphabet (GOOG 1.45%) (GOOGL 1.51%) and Oracle (ORCL -0.50%) may still have enough upside potential to make them top picks to buy now and hold for the long run.
1. Alphabet
Digital advertising titan Alphabet — owner of Google Search, YouTube, Google Cloud, the Android mobile operating system, and the recently launched Gemini large language model — has been facing several AI-associated challenges in recent times.
The advancements made by OpenAI and Microsoft in generative AI have been disruptive for Alphabet’s core Google search business. However, to withstand these pressures, Alphabet launched its own generative artificial intelligence-based family of Gemini models. The family comprises models of four different sizes, each designed for its own set of use cases and suited for different deployment environments. Gemini 1.5 Pro can handle 2 million tokens — which is the longest context window of any large-scale foundational model to date. Gemini can process various forms of data inputs including text, audio, images, and video, and can allow complex interactions. Gemini enables developers to create applications requiring extensive context for various use cases. Gemini has been integrated across all of Alphabet’s core offerings to improve their overall user experiences.
The company is now rolling out AI Overviews (an advanced AI-powered feature powered by the Gemini model) in its Google Search offering. Besides seeing positive trends in the testing phase in search usage and user satisfaction, the company also noted higher user engagement from users aged 18 to 24 when Google Search was combined with AI overviews. Alphabet has also expanded the types of queries it can answer with AI features such as Visual Search via Lens and Circle to Search on 100 million Android mobile devices.
Among the signs that these features are helping the company maintain its search market dominance, revenues from the “Google Search & other” business segment jumped by 13.8% year over year in the second quarter.
Alphabet’s Google Cloud business crossed the $10 billion quarterly revenue mark for the first time in the second quarter and generated over $1 billion in operating profit. YouTube also remains a major growth driver, and in June, it extended its streak as the most-watched streaming platform on U.S. televisions to 17 consecutive months. YouTube is benefiting from rising viewer engagement and the increasing shift of advertising budgets from linear television to connected television. Alphabet is also making progress in monetizing its short-form video offering, Shorts.
Alphabet had $101 billion in cash and marketable securities on its books at the end of the second quarter, and it generated $60.8 billion in free cash flow over the past four reported quarters. Despite this, the company trades at a price-to-sales multiple of 6.75, significantly lower than many AI companies.
Considering its many AI-powered growth catalysts, its robust financials, and its currently reasonable valuation, Alphabet may deliver top-notch results in the coming years for investors who buy it now.
2. Oracle
As one of the world’s best AI data center infrastructure players, Oracle is benefiting dramatically from increasing demand for the computing power and storage required to train large language models.
The explosive growth in demand for Oracle’s cloud services pushed its remaining performance obligation (a measure of order backlog) up by 44% year over year to $98 billion in the fourth quarter of its fiscal 2024 (which ended March 31). The company’s revenues rose by just 6% to $53 billion. However, management is guiding for double-digit percentage revenue growth in its fiscal 2025, and anticipates revenues from cloud infrastructure services will soar even faster than the 50% growth reported in fiscal 2024.
Oracle’s cloud infrastructure services and enterprise applications are widely considered more cost-effective, faster, and secure than those of their competitors in training large language models. The company also offers multiple deployment options, including public cloud, multicloud, sovereign cloud, and even dedicated cloud.
Not surprisingly, prominent tech companies such as OpenAI, Nvidia, Microsoft, and Alphabet use Oracle’s cloud services and data centers. It is seeing a dramatic increase in sales momentum, and so far in 2024, it has signed more than 30 AI contracts worth a total of nearly $17 billion.
Oracle recently launched Exadata Exascale, a cost-effective and intelligent data architecture for high-performance cloud computing. This will help it target more cost-sensitive customers.
The last impressive factor for Oracle is that the stock is currently trading at 7 times trailing 12-month sales, lower than the software industry’s median sales multiple of 9. At this reasonable valuation, the stock seems like a worthwhile pick for smart buyers.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Manali Pradhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Microsoft, Nvidia, and Oracle. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
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