How This AI Stock Went From Lost Cause to Leading Force

Only a few companies become the undisputed leaders of their particular industries. Those few that achieve such greatness do so only by working hard, creating innovative products and services and disrupting would-be competitors before they can become a threat. The financial rewards for investors who buy shares of these winners are often substantial.

But one thing that often goes underappreciated by investors is just how difficult it is for these companies to maintain their leadership positions. Once the strength of their business models becomes apparent, these leaders inspire disruptors of their own that seek to tear them down. Moreover, once a company gets a taste of leadership in one area, it's natural to try to expand its business and extend that leadership to other areas, and that too invites competition.

Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) has become one of the most important companies in the world. It's leading the way forward in artificial intelligence, and its efforts in streaming video, autonomous vehicles, and cloud computing have contributed to its overall success. Yet as inevitable as it might seem now that Alphabet would achieve its current heights, it actually wasn't long ago that many investors had given up on the parent company of Google as an example of a business that had lost its way. That makes Alphabet worth a closer look for the Voyager Portfolio, and this three-part series on the company starts out with how Alphabet grew into its current status and the challenges it faced to get there.

Image source: Getty Images.

Becoming the most important tool provider for the internet

Alphabet encompasses many businesses now, but the Google internet search engine still represents a huge part of its overall business. Google got its corporate start in 1998, having originated as a research project at Stanford University by co-founders Sergey Brin and Larry Page. Despite there being a host of other search engines available, including Yahoo!, AltaVista, Excite, and InfoSeek, it didn't take long for Google to establish the superiority of its search product. When Google started selling ads in 2000, it built the financial foundation that would eventually lead to its going public in 2004.

From there, Google set about expanding its addressable market. The launch of Gmail put Google directly into competition with giants like Microsoft (NASDAQ: MSFT). Google's mapping software became an industry standard, displacing early specialists like MapQuest. The Chrome browser took a further shot at Microsoft's Internet Explorer, while its Android smartphone operating system took aim at Apple (NASDAQ: AAPL). Eventually, the company's aspirations went so far that they led its leaders to restructure the organization, creating Alphabet as a parent company for Google while also incorporating other businesses like autonomous vehicle technology pioneer Waymo.

How Alphabet started to lose its winning reputation

Yet despite Alphabet's long-term success, it didn't get everything right. Indeed, by the early 2020s, some investors thought that Alphabet's future looked bleak. At the time, the company faced challenges like these:

• Alphabet was squarely in the crosshairs of antitrust regulators who wanted to break up the company's stranglehold over online search.
• As companies like Microsoft and Amazon (NASDAQ: AMZN) found lucrative businesses by helping businesses with their digital transformation efforts by providing cloud computing services, Alphabet wasn't able to catch up, with Google Cloud remaining a distant third behind Amazon Web Services and Microsoft Azure.
• Alphabet also didn't participate as much in the initial phase of excitement about artificial intelligence, as Microsoft's massive investment in OpenAI and the success of Nvidia (NASDAQ: NVDA) in building AI-targeted semiconductor chips got a lot more attention.

As a result, Alphabet stock briefly traded at earnings multiples in the high teens. That might not seem all that cheap, but compared to its peers, it represented a massive discount.

How Alphabet got its future back

Despite investor concerns, Alphabet didn't blink. It won key antitrust litigation to avoid a breakup. It integrated AI features into its search capabilities. It developed a leading AI large language model in Gemini.

The results have been impressive. In our second article of this three-part series on Alphabet, you'll learn more about Alphabet's financial performance and what has made the stock so attractive.

Dan Caplinger has positions in Alphabet, Amazon, Apple, Microsoft, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.