Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) fumbled the ball with Gemini’s image generation. The point of contention is the AI tool’s inability to create images of white people but having no issue creating images of black people. The tool could only depict historical figures like the Founding Fathers as black, even though that’s not historically accurate. That’s how the tool was designed.
Unsurprisingly, many people were upset, which prompted Alphabet to take the generative AI project offline. Sundar Pichai expressed the unacceptable nature of the tool’s settings and that the team is working around the clock to fix Gemini.
This isn’t Alphabet’s first fiasco with AI tools, and it’s not even the first time a publicly-traded corporation has made this type of mistake. Nonetheless, this news doesn’t have a material impact on Alphabet’s business and presents a buying opportunity. Thus, I am bullish on the stock.
Alphabet Isn’t AI or Bust
Artificial intelligence is an innovative technology, but investors may be putting too much importance on it. If a company is involved in artificial intelligence but has horrible financials, some investors can overlook it. The opposite is also true and applies to Alphabet.
The tech giant has superb financials. Investors should be happy about the company’s advertising rebound. Revenue was up by 13.5% year-over-year in the fourth quarter of 2023, while net income jumped by 52% year-over-year.
These are good numbers for a company with a 23.5 P/E ratio and a net profit margin of roughly 24%. Google Cloud also flipped to profitability recently and can help the corporation achieve higher net profit margins in 2024.
Despite good numbers across the board, investors honed in on a mishap with one of the company’s AI projects. Alphabet seems to be taking the criticism seriously and won’t relaunch the AI picture generator in a few weeks.
It’s reasonable to assume Alphabet will do a good job at patching up the tool, and then the stock should rebound to where it was before the news broke out. During those few weeks, Alphabet will continue to generate billions of dollars in ad revenue and likely gain market share in cloud computing.
The underlying components that turned Alphabet into a dominant tech giant and helped it maintain that position aren’t going anywhere. Most people will still use Google to search for things and YouTube to watch videos.
The Bard Episode
For a company that uses artificial intelligence to power its search engines, Alphabet has had some mishaps along the way. Gemini is the big blunder this year, but Alphabet stock also fell when chatbot Bard made a factually inaccurate statement during its first product demo.
Alphabet stock fell 9% on that day and dropped by 15% in roughly three weeks. Investors bought on the dip, and the stock is now more than 50% higher from where it was after that three-week drop.
If the Bard mishap is any guidance, shares should continue to fall for the next one to three weeks before beginning their recovery. Alphabet has the resources to fix AI tools when problems emerge.
Alphabet makes most of its money through advertising and cloud computing, and the company has a low enough valuation to accommodate mistakes along the way. If Alphabet had a 100 P/E ratio, I would feel differently about Gemini’s AI image generator.
Netflix and Cleopatra
The latest debacle with Google’s Gemini reminds me of Netflix’s (NASDAQ:NFLX) Cleopatra film. Just as Gemini did with the Founding Fathers, Netflix decided to depict Cleopatra as a black person. The documentary prompted a lot of backlash against Netflix and even resulted in Egypt suing Netflix for $2 billion.
Netflix stock is up by roughly 50% since that incident. A strong Q4 earnings report released near the end of January prompted a new rally for the stock.
It’s a much bigger deal for Alphabet’s artificial intelligence tool since this is a widespread problem instead of an isolated incident like Cleopatra. However, this example demonstrates how investors looking at long-term catalysts can benefit from short-term declines of this nature.
Is GOOGL Stock a Buy, According to Analysts?
Alphabet stock is seen as a Strong Buy on Wall Street based on 29 Buy ratings and eight Holds assigned in the past three months. No analyst gave the stock a Sell rating. The average GOOGL stock price target implies 20.7% upside. The highest price target of $175 suggests the stock can gain roughly 32%.
The Bottom Line on Alphabet Stock
Alphabet is a financially strong company that makes most of its money from advertising and cloud computing. These revenue streams will not get disrupted by the Gemini news, and the generative image AI tool will be back on the market within a few weeks.
Alphabet essentially has a monopoly in search and trades at a low valuation. This pullback offers an opportunity for long-term investors who can hold onto shares for several years.
