Alphabet (GOOGL) made a $100 billion blunder... but don't count this giant out just yet.
Google's parent company is in a high-stakes battle for dominance in artificial intelligence ("AI"). The arms race started when ChatGPT appeared on the scene...
This chatbot is capable of surprisingly humanlike conversation. And it can answer complicated questions. As a way for folks to do research and gather information, ChatGPT does a lot of what Google does... but in a fraction of the time.
That's uncomfortable for Google. And it gets worse.
ChatGPT's parent company, OpenAI, is in a multibillion-dollar partnership with Microsoft (MSFT). And on February 7, Microsoft revealed official plans to bring a ChatGPT-like feature to its Bing search engine.
As soon as ChatGPT news started to spread, investors wondered when Google would enter the fray. Sure enough, the search giant finally made a move. The day before Microsoft's Bing announcement, Google unveiled its own chatbot, "Bard"... only to fumble its debut.
The flub cost Alphabet big time. Its shares tanked. But for investors, the slide could be a great opportunity. Let me explain...
Google unveiled Bard in a tweet on February 6, showing a short video clip of the bot in action.
In it, a user asks, "What new discoveries from the James Webb Space Telescope can I tell my 9-year-old about?"
Bard responded with a few ideas – and unfortunately, one of its answers stood out. Take a look...
Bard told the user that James Webb "took the very first pictures of a planet outside of our own solar system."
The problem is, that's false... because the first such photos were taken by a completely different device called the Very Large Telescope in 2004.
The tweet cost Alphabet roughly $100 billion in market value in a single day. It was a 7% fall in market capitalization... one of the worst one-day declines in the company's history.
Don't be fooled by the sell-off, though. The data shows that similar moves in Alphabet's shares have been great long-term buying opportunities.
I tested forward returns for every time Alphabet swooned 7% or more. Take a look...
Historically, GOOGL is a great long-term portfolio holding. Simply buying and holding the stock has returned 5% every three months, 11% every six months, and 23% every year.
Those numbers are incredible. The company has been a meteoric growth story ever since it went public.
Still, we could beat those returns by buying Alphabet after the recent decline. History tells us that GOOGL outperforms after a 7% fall...
Three months after the trigger, GOOGL was up about 6%. And after six months, it was up about 9%. These returns are pretty normal for this stock. But after cases like these, GOOGL outperformed over the following year... returning an average of 35%. That's 12 percentage points more than in a typical year.
Best of all, this signal is reliable. Falls like this have happened just 18 times since 2004. And of those 18 signals, 88% were winners after a year.
That means probability is on our side if we buy the dip today.
Simply put, the AI market isn't rational today – it's a craze. Everyone is overreacting to every piece of AI news in the market.
The Alphabet sell-off is fully divorced from business fundamentals. Google is the same great business it was before Bard's error... And investors who buy today are likely to outperform.
Good investing,
Sean Michael Cummings
Further Reading
"One of last year's biggest financial stories is still playing out... but the world stopped watching," Sean writes. A major commodity has crashed. But while investors are running for the exits, one signal suggests that the fear is about to blow over... Learn more here.
"With so much negative sentiment in the air, strong companies may find it easier to beat expectations," Jeff Havenstein says. Investors tend to look at the past – not the future. It's a common mistake. And it could lead to bullish surprises in 2023... Read more here.
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