Alphabet appears to be in control of its AI destiny.
Google parent Alphabet (GOOG -2.99%) (GOOGL -3.10%) delivered strong revenue and earnings growth in the second quarter of 2024. However, because YouTube advertising revenue fell short of Wall Street expectations, the stock tumbled 5% following the Q2 update.
Many investors are missing the forest for the trees with Alphabet. Here’s why it’s arguably the best artificial intelligence (AI) stock in the “Magnificent Seven.”
1. Its revenue and earnings are growing much faster than Apple’s and Tesla’s
Alphabet continues to trounce the biggest and smallest Magnificent Seven stocks — Apple (AAPL -0.48%) and Tesla — in revenue growth. Its earnings are growing much faster than theirs, too.
Despite the YouTube advertising disappointment, Alphabet’s Q2 revenue jumped 14% year over year, with earnings soaring nearly 29%. It’s important to note that YouTube ad revenue increased 13%.
Although that wasn’t as much as analysts expected, the growth wasn’t too shabby. That’s especially the case considering there was no longer a year-over-year boost from the YouTube TV price increase that took effect in 2023 Q2.
Apple hasn’t reported its Q2 results yet. However, the company’s revenue declined 4% year over year in its quarter ending March 30, 2024, with earnings slipping 2% lower. Perhaps Apple’s new AI capabilities will reignite growth with the upcoming launch of its new iPhone model, but the company has a long way to go before it catches up with Alphabet.
Tesla’s revenue increased by a paltry 2% year over year in Q2, and net income plunged 45%. It’s fair to say this Magnificent Seven stock isn’t looking all that magnificent right now.
2. It isn’t outsourcing its AI development, like Microsoft
Like Apple, Microsoft (MSFT -2.45%) hasn’t announced its results for the most recent quarter. However, the tech-giant’s growth in the quarter ending March 31, 2024 was in the same ballpark as Alphabet’s in Q2.
The big advantage Alphabet has over Microsoft, though, is that it isn’t outsourcing AI development. Microsoft’s success stems in large part from its partnership with OpenAI. Without OpenAI’s GPT-4, I suspect Microsoft would be floundering.
Meanwhile, Alphabet CEO Sundar Pichai proclaimed in the company’s Q2 earnings call this week, “[W]e are in a strong position to control our destiny as the technology [AI] evolves.” He added, “Importantly, we are innovating at every layer of the AI stack, from chips to agents and beyond, a huge strength.” I agree with Pichai’s assessment.
3. It’s cheaper than Amazon and Nvidia
Alphabet and Amazon (AMZN -0.54%) share a lot in common. Both companies are effectively harnessing AI to improve profitability and operate fast-growing cloud units that are benefiting from the generative AI boom. Both have developed their own AI chips but still depend heavily on Nvidia‘s (NVDA -1.72%) graphics processing units (GPUs).
Amazon delivered stronger earnings growth in its last reported quarter than Alphabet did in Q2, although its revenue growth was slightly lower than Alphabet’s. Nvidia blew past all other Magnificent Seven members on both the top and bottom lines.
However, Alphabet beats Amazon and NVidia on one important front: valuation. The Google parent’s shares trade at a price-to-earnings-to-growth (PEG) ratio of 1.34. Amazon’s and Nvidia’s PEG ratios are 1.98 and 1.39, respectively.
4. Its growth wild card is more compelling than Meta’s
That leaves Meta Platforms (META -1.70%). The social media leader’s revenue and earnings soared much more in its last reported quarter than Alphabet’s did in Q2. Meta isn’t outsourcing its AI development like Microsoft, and its PEG of 1.16 is even lower than Alphabet’s.
All of this might seem to make Meta the best AI stock in the Magnificent Seven, but I think Alphabet’s growth wild card is more compelling than Meta’s. And that’s enough to put Alphabet on top for me.
What are these companies’ growth wild cards? For Alphabet, it’s the company’s Waymo self-driving car technology unit and “other bets.” For Meta, it’s the metaverse.
The metaverse could be as big an opportunity as Meta CEO Mark Zuckerberg predicts. I feel much more confident, though, in the opportunity the robotaxi market presents for Waymo.
Best AI stock in the Magnificent Seven?
Do I think there are solid arguments that some of the other Magnificent Seven members could be the best AI stock in the group? Absolutely. Although I think Alphabet stands at the top now, my opinion could easily be swayed by new developments in the fast-moving AI space.
The reality is that all seven stocks could be huge winners because of AI tailwinds over the next decade and beyond. There’s no need for investors to try to choose which is the best when you can buy several or all of them.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Keith Speights has positions in Alphabet, Amazon, Apple, Meta Platforms, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. 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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