Generative AI's Role in Alphabet's Growth Strategy

When MTV launched in 1981, it made a splash with its first video, The Buggles' "Video Killed the Radio Star." At that time, it felt as though the song's message might come to fruition. Yet, after over four decades, traditional radio remains vibrant, while MTV's peak has passed.

This nostalgic reference brings to mind the current discussions surrounding generative AI and its influence on Alphabet Inc. (GOOG) (GOOGL). Following the launch of OpenAI's ChatGPT in late 2022, there were claims that generative AI could spell doom for Google. However, Alphabet believes that this technology could be a boon rather than a threat.

Let’s explore how generative AI fits into Alphabet’s growth plans.

Google Cloud

According to Jack Caporal, research director at The Motley Fool, Alphabet perceives generative AI as a significant opportunity due to its established expertise in the field. A key area where generative AI could propel Alphabet forward is through its Google Cloud segment.

Google Cloud stands as the third-largest cloud service provider, following Amazon Web Services and Microsoft. In the fourth quarter of 2024, Google Cloud reported a 30% revenue increase, totaling $11.9 billion. During Alphabet's Q4 earnings call, CFO Anat Ashkenazi highlighted that much of this growth stemmed from robust demand for AI products, stating, "We exited the year with more demand than available capacity."

Among the generative AI tools that contributed to this rise are Vertex AI Studio, which enables customers to quickly prototype and test AI models, and Vertex AI Builder, which supports the creation of AI applications. Tools like Generative AI Document Summarization provide text extraction and summarization from PDF documents, while Gemini Code Assist aids in code development and management.

Despite using Nvidia GPUs for some operations, Google Cloud also incorporates its proprietary chips to support generative AI models. These include Tensor Processing Units (TPUs) and the specialized Trillium chip for AI training and inference, as well as Axion chips, which are built on Arm's Neoverse V2 platform.

Advertising Impact

While Google Cloud is essential to Alphabet, the majority of its revenue still comes from advertising on platforms like Google Search and YouTube. Generative AI also plays a vital role in enhancing these services.

The launch of AI Overviews—generative AI summaries of search results—has been remarkably successful. Sundar Pichai, Alphabet and Google CEO, noted during the Q4 earnings call, "People use Search more with AI Overviews, and we see usage growth over time as users learn to ask new types of questions."

Furthermore, Google Circle to Search offers functionality on Android devices, allowing users to investigate displayed information by circling or highlighting elements on their screen. Pichai emphasized that this feature has gained popularity among younger users, with those who experience it initiating more than 10% of their searches with it.

Alphabet is also deploying generative AI tools that assist businesses in creating and managing their advertising strategies. Chief business officer Philipp Schindler mentioned in the Q4 earnings call that, based on a Nielsen analysis, YouTube's AI-powered video campaigns deliver an average of 17% higher return on investment compared to manual campaigns.

The Future of Alphabet with Generative AI

Looking ahead, what does generative AI hold for Alphabet? One promising aspect is its development of agentic AI.

Alphabet's Gemini 2.0 model is specifically designed for agentic AI advancements. Projects like Astra aim to create an autonomous AI agent that operates on smartphones and smart glasses, enabling users to interact with it verbally or through video. Project Mariner offers multimodal and reasoning capabilities, capable of automating tasks within browsers, while Jules assists in coding with Javascript and Python.

Ultimately, Alphabet's ambition to create artificial general intelligence (AGI)—likely leveraging generative AI—could present its most significant growth opportunity yet. Google DeepMind's CEO, Demis Hassabis, anticipates that AGI could be realized within the next decade.

AI, Growth, Cloud, Advertising, Technology