The AI Stock Built for Investors Who Don't Want to Trade -- Just Compound
Key Points
Alphabet's operating income jumped 30% last quarter, as Search revenue grew at the fastest rate in four years.
The cost of AI responses in Search is falling, benefiting the company's profits.
Alphabet is one of the few companies profiting from AI on the consumer side.
- 10 stocks we like better than Alphabet ›
Artificial intelligence (AI) is making investors rethink the staying power of some businesses that could be vulnerable to disruption. However, that only strengthens the case for investing in the companies causing the disruption.
Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) has built the models, platforms, and cloud infrastructure to profit big from AI. On a trailing-12-month basis, net profit surged 44% to a whopping $160 billion. It's already turning AI into growing revenue and profits -- and it's just getting started.
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Image source: Getty Images.
Stellar growth where it counts
Since 2021, Alphabet's growing revenue streams across Google Search ads, YouTube ads, subscriptions, platforms and devices, and Google Cloud have pushed the stock up 166%. That momentum accelerated last year as Google rolled out new AI features for Search powered by Gemini.
Total revenue rose 22% year over year in the first quarter to nearly $110 billion, with Search delivering its fastest quarterly growth rate in nearly four years.
While revenue looks strong, the company's profits were even stronger. Operating income grew 30% over the year-ago quarter to $39 billion.
This comment from CEO Sundar Pichai during the earnings call highlights why Alphabet may have room to expand margins further: "Since upgrading AI Overviews and AI Mode to Gemini 3, we have reduced the cost of core AI responses by more than 30%, thanks to continued hardware and engineering breakthroughs."
That kind of cost leverage matters because Search remains Alphabet's biggest profit engine, accounting for 55% of Q1 revenue. And while Alphabet is spending heavily to expand its AI and cloud infrastructure, Google Cloud is showing the payoff: Cloud operating profit jumped 203% year over year to more than $6.5 billion in the quarter.
A long-term compounder
Higher capital spending could weigh on near-term margins and earnings, but over time, investors should expect the company to keep posting higher revenue and earnings. Pichai signaled that the business is experiencing a structural improvement in the economics of AI workloads. As the use of AI Search features increases, the long-term payoff should be significant if it translates into improving profitability.
The main weakness for Alphabet is that it generates 70% of revenue from advertising, which can make results vulnerable to softness in ad spending during recessions. That contributed to the stock's 39% decline in 2022. Over time, though, the digital ad market should keep growing, providing a tailwind -- and that tailwind has already delivered a 10x return to investors over the last 10 years.
Alphabet can monetize AI across both enterprise (Google Cloud) and consumer services (Search and YouTube) while growing profits. This makes it one of the best AI stocks to buy and hold for long-term compounding.
Should you buy stock in Alphabet right now?
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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.
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