Alphabet Stock at All-Time Highs: Can GOOGL Overcome Gemini’s Shortcomings?

Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL)continues to ride AI and cloud tailwinds. Quarter-one solid earnings results and integrating Gemini AI into Google Search and its suite of Google apps have tech bulls confident in the long-term success of Alphabet stock.

AI has driven the market ever since OpenAI launched ChatGPT in 2022. While Alphabet stock has trailed other megacap tech stocks like Nvidia (NASDAQ:NVDA) and Meta Platforms (NASDAQ:META), shares of have still returned over 38% in 2024.

Google’s cloud segment has shown increasing profitability in recent quarters and continues to take market share from Amazon’s (NASDAQ:AMZN) AWS and Microsoft’s (NASDAQ:MSFT) Azure.

Cloud revenue has increased by 28% since Q1 of 2023, and investors will look for continued growth when the company reports earnings in a couple of weeks. 

The stock also has the lowest forward price-to-earnings ratio of the Magnificent 7, trading at just 25x forward earnings. The bull case for GOOGL stock at all-time highs is clear, so why am I suggesting hitting the brakes on buying more?

These Headwinds Can Weigh Alphabet Stock

Although investors are pricing Alphabet as an AI leader, it remains to be seen if Gemini is on par with ChatGPT or Claude AI. The second quarter earnings results should shed some light on whether Gemini has affected the company’s financials.

Gemini is still trying to overcome negative sentiment surrounding their AI-driven image generation. CEO Sundar Pichai was critical of Gemini’s outputs, describing them as ‘completely unacceptable.’

The image results and odd outputs from Gemini’s AI chatbot had investors skeptical of Google’s AI capabilities. 

As the market continues to make new all-time highs, whispers of a correction or even the implosion of the AI bubble are getting louder. Combined with the potential for an imminent recession and the strongest Dollar Index reading since 2004, it is easy to see why many are calling for an interim top-down in equities.

AI Competition Is Heating Up 

Nearly every Big Tech company has a hand in the generative AI space, and competition between LLMs is heating up. While OpenAI and Microsoft have a clear head start with ChatGPT, others have joined the race. Amazon has backed Anthropic and their Claude AI platform, and Meta has their open-source Llama 3 model.

OpenAI is the current leader in the space, and the others, including Gemini, are competing to be the PepsiCo to its Coca-Cola. The industry is awaiting OpenAI to launch its GPT-5 platform, which CEO Sam Altman says will be a significant leap forward from GPT-4.

Can Gemini compete with GPT? The software has shown it can hold its own against GPT, especially in multimodal tasks. But more importantly, Gemini must overcome their reputation after Alphabet rushed it out to compete with OpenAI. 

GOOGL Stock Is A Hold Ahead Of Q2 Earnings

This earnings season could be volatile. With the indexes trading at all-time highs, the possibility of a preelection correction is undoubtedly on the table. However, the many conflicting factors I mentioned make me hesitant about issuing a buy or sell rating for Alphabet.

Alphabet’s stock is undervalued compared to their peers, even if they are trading at all-time highs. Microsoft is an excellent comparison for Alphabet, given their focus on AI software integration, internet search, and cloud computing.

Microsoft currently trades at about 35x forward earnings. If Alphabet can continue to grow their market share through Gemini and Google Cloud, a P/E ratio of 35 to match Microsoft isn’t out of the question. Alphabet at 35x forward earnings would make it about $257 per share. 

I recommend holding GOOGL stock through the earnings season for Big Tech companies. You will either get a dip-buying opportunity or, if the report is positive, the stock will likely not reach my optimal range at about 35x forward earnings.

Either way, time is on your side if you are a Google bull. 

On the date of publication, Michael Que held a LONG position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.