The inventory market is at the moment pretty costly, with the broader market, as measured by the S&P 500, buying and selling at 23.7 instances ahead earnings. Which means the best-performing shares of the second half of the yr will doubtless be undervalued right this moment or have jaw-dropping progress to propel them to new heights.
Within the AI realm, I feel one firm that might have a implausible second half of the yr is Alphabet (GOOG 0.66%) (GOOGL 0.81%). The market is at the moment bearish on Alphabet because of its dependence on the Google Search enterprise. The idea is that this a part of Alphabet is in bother, which is an issue as a result of it generated 56% of Alphabet’s whole income within the first quarter.
Nevertheless, I feel there are a couple of caveats to that evaluation, and Alphabet’s present low-cost inventory value units it up properly as a inventory that may very well be an enormous winner within the second half of 2025.
Picture supply: Getty Photos.
The market is scared of Google Search shedding to generative AI
Alphabet is the mum or dad firm of Google, and it additionally has different manufacturers underneath its umbrella, together with YouTube, Waymo, and the Android working system. However the Google Search engine is the money cow of the enterprise and is what constructed Alphabet into the corporate that it’s right this moment.
The market is anxious that generative AI will disrupt Google Search, and there may be some proof to help this declare. Though it stays impressively excessive, Google Search’s market share has fallen beneath 90% for the primary time since 2015. Moreover, Apple‘s service chief testified in courtroom that he believes AI will quickly change search engines like google.
Many individuals have changed Google Search with the generative AI mannequin of their selection, and a few generative AI firms are growing net browsers to supply customers with an AI-first net expertise.
These are all alarming developments for Alphabet, however the actuality is that they have not but affected its outcomes. In Q1, Google Search’s income rose 10% yr over yr. We’ll get an replace on Q2’s outcomes on July 23, however I would anticipate extra of the identical power.
The fact is that Google is how the overwhelming majority of individuals use the web. Whereas some savvy customers in tech or different fields might lean right into a extra generative AI-focused web expertise, this ignores the big swath of people that don’t want the firepower that generative AI supplies. Moreover, Google has built-in AI search summaries into its outcomes, and these summaries doubtless present sufficient AI to fulfill the plenty.
It will play out over a number of years, however the market has already assigned Alphabet an earnings a number of that assumes it’s going to lose this battle.
Alphabet’s inventory trades at a reduction to the S&P 500
With the market buying and selling for 23.7 instances ahead earnings, it is no secret that it has turn out to be costly. Alphabet is not practically that expensive, because it trades for 19 instances ahead earnings.
GOOGL PE Ratio (Ahead) information by YCharts
If Alphabet posts robust outcomes to finish the yr, this might trigger the market to vary its viewpoint on Alphabet’s inventory and assign it an earnings a number of extra akin to its large tech friends within the excessive 20s to low 30s. This may end result within the inventory rising by round 50%, which might simply allow it to be one of many top-performing shares within the second half of the yr.
We’ll see if that occurs, however even when it does not, I feel the market is underestimating the facility of habits ingrained inside Google’s consumer base. It may very well be an outperformer over a number of years because it proves that Google Search is right here to remain.
Suzanne Frey, an government at Alphabet, is a member of The Motley Idiot’s board of administrators. Keithen Drury has positions in Alphabet. The Motley Idiot has positions in and recommends Alphabet and Apple. The Motley Idiot has a disclosure coverage.
