This AI Stock Just Joined the Dow Jones. It's Up 300% Since 2023 and History Says This Will Happen Next.

Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) shares have added more than 300% since the artificial intelligence (AI) boom began in earnest in January 2023. While investors initially feared AI would disrupt the company's dominance in internet search, Alphabet has successfully integrated the technology into its advertising and cloud products.

On June 29, Alphabet was added to the Dow Jones Industrial Average (DJINDICES: ^DJI), where it replaced Verizon Communications. Alphabet is the only the 16th stock to join the index in the last 15 years, and history says this will happen next.

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History says Alphabet will underperform the S&P 500 in the next year

The Dow Jones Industrial Average measures the performance of 30 blue chip stocks, all of which are also members of the S&P 500 (SNPINDEX: ^GSPC). However, while the S&P 500 is weighted by market capitalization, the Dow Jones is weighted by share price, meaning its performance is more heavily influenced by stocks that trade at higher prices.

Here's how S&P Global, the curator of the Dow Jones, explains the inclusion criteria: "While, a stock is typically added only if the company has an excellent reputation, demonstrates sustained growth, and is of interest to a large number of investors."

In the past 15 years, 16 companies have been added to Dow Jones. The average stock gained 7% during the year following its inclusion in the index. Meanwhile, the S&P 500 returned an average of 20% over the same period. In other words, stocks usually underperform the S&P 500 over the 12-month period following their inclusion in the Dow Jones.

Past performance is never a guarantee of future returns, but we can use that data to make an educated guess about where Alphabet shares might trade in a year. The stock closed at $354 per share on June 29, the day it joined the Dow Jones. It will advance 7% to $378 per share by July 2027 if its performance matches the historical average. That implies 5% upside from its current share price of $360.

Importantly, stocks usually jump following inclusion in a major stock market index like the S&P 500 or Nasdaq Composite because investors who own funds tied to those indexes are essentially forced to buy shares. But fewer funds track the Dow Jones than the other major indexes, so share price appreciation tends to be more muted after a stock's inclusion.

Of course, how Alphabet actually performs over the next year depends on its financial results and investor sentiment.

Alphabet's revenue growth has accelerated in five straight quarters

Alphabet reported impressive financial results in the first quarter. Revenue rose 22% to $110 billion, the fifth straight acceleration. By segment, advertising sales increased 15%, and cloud computing sales increased 64%. Meanwhile, GAAP earnings soared 82%drivenue in large parbyto unrealized gainonom its investment in Space Exploration Technologies.

Investors have good reason to think Alphabet can maintain its momentum. According to Grand View Research, digital ad sales will grow at 14% annually through 2030, and cloud computing spend will grow at 16% annually over the same period. Alphabet, the largest digital advertising company and third-largest cloud company, is well positioned to benefit from those industrywide tailwinds.

In particular, Alphabet is likely to take share in cloud computing because of its leadership in custom artificial intelligence accelerators and the popularity of its Gemini models. The company recently decided to sell its AI accelerators, called tensor processing units (TPUs), to customers for use in their own data centers. And Gemini is the second most popular AI chatbot behind OpenAI's ChatGPT.

Looking ahead, Wall Street estimates Alphabet's earnings will grow at 15% annually in the next three years. That makes the current valuation of 27 times earnings look reasonable. Better entry points may arise in the future, but patient investors can buy a small position in Alphabet stock today.

Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and S&P Global. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.