At present, the stock market is relatively costly, as indicated by the S&P 500, which is trading at approximately 23.7 times its future earnings. This suggests that some of the top-performing stocks in the second half of the year might be underpriced right now or possess remarkable growth rates to catapult them to unprecedented heights.
In the field of artificial intelligence, I believe one company poised for an impressive second half of the year could be Alphabet (GOOG) (GOOGL). The financial market has been pessimistic about Alphabet, primarily due to its heavy reliance on its Google Search business. This pessimism stems from concerns that this sector may be struggling, which is concerning given that it accounted for approximately 56% of Alphabet’s overall revenue in the first quarter.
Yet, it’s important to note a few qualifiers regarding this evaluation, and given its relatively low share price at present, Alphabet appears well-positioned to become a significant market winner by the latter part of 2025.
The market is fearful of Google Search losing to generative AI
Under Alphabet’s corporate roof reside several well-known brands such as Google Search, YouTube, Waymo, and Android Operating System. However, it’s Google Search that has been the primary revenue generator for Alphabet, playing a significant role in shaping the company into its current form.
There’s growing apprehension that advanced AI technologies could significantly alter the landscape of Google Search. In fact, there seems to be a smidgen of proof backing this up. For instance, Google Search’s dominance in the market has dropped below the 90% mark for the first time since 2015. Furthermore, Apple’s top executive stated under oath that he anticipates AI will eventually overshadow search engines.
A significant number of individuals are now opting for a specific AI model over Google Search, while certain AI firms are working on creating web browsers that offer users an internet experience primarily driven by AI.
While these advancements pose concerns for Alphabet, it’s important to note that they have yet to impact its financial performance. In the first quarter, Google Search saw a 10% increase in revenue compared to the same period last year. The upcoming release of Q2 results on July 23 will provide more insight, but I anticipate continued robust performance.
It’s clear that for most people, Google is their primary way of interacting with the internet. While certain tech-savvy individuals or professionals might prefer a more advanced, AI-centric web experience, it’s important to remember that many users don’t require the heavy-duty capabilities that generative AI offers. Moreover, Google has incorporated AI-generated search summaries into its results, and these summaries are often enough for the average user.
Over a span of several years, the situation unfolds, yet the market has given Alphabet an earnings ratio that anticipates they’ll end up losing this competition.
Alphabet’s stock trades at a discount to the S&P 500
In simple terms, the current market is quite costly, trading at approximately 23.7 times its future profits. However, Alphabet isn’t as high-priced; it’s only trading around 19 times its future earnings.
If Alphabet delivers robust annual earnings, this could potentially shift the market’s perspective on Alphabet’s shares, leading them to assign a higher earnings multiple similar to other major tech companies, ranging from the high 20s to low 30s. This adjustment might trigger a significant increase in the stock price by approximately 50%. Such a surge would likely position Alphabet as one of the standout performers among stocks during the second half of the year.
Let’s wait and see if the event transpires, but I believe there’s a strong possibility that the market undervalues the strength of habits embedded in Google’s user community. Over a long period, Google Search might outperform due to its enduring presence.
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2025-07-21 12:59