Alphabet (GOOGL) just escalated the artificial-intelligence ("AI") arms race...
The stakes are high already. After all, AI is a money printer.
In fact, it may make up most of the gains we've seen in the market this year.
According to one strategist from French financial firm Societe Generale, "The AI boom and hype is strong... so strong that without the AI-popular stocks, S&P 500 would be down 2% this year."
As the arms race heats up, Alphabet is at a pivotal point...
For a while, it seemed like the tech giant would lag behind in the arms race. But that's changing today. And the upside for investors could be immense.
Let me explain...
The AI frenzy kicked off in November, when San Francisco-based company OpenAI launched ChatGPT. This chatbot wowed users with its human-like conversation. It also served up quick answers to complex questions – greatly cutting down on research time.
Immediately, ChatGPT posed an existential threat to Alphabet and its Google search engine.
Even worse, a major donor behind the new technology was Alphabet competitor Microsoft (MSFT). The software giant has poured billions of dollars into OpenAI. And in February, Microsoft added ChatGPT capabilities to its Bing search engine.
In response, Google tweeted out a video of its own chatbot named Bard... But Bard debuted with a whimper. In the video, Bard gave false information to one of its trial users.
The market was quick to punish the error. Alphabet lost 7% of its market cap in one day.
But now, all is forgiven. At its I/O developer conference last week, Google announced a new suite of AI integrations. And the market cheered the news...
GOOGL jumped 4% on May 10. And the stock jumped another 4% on May 11. Take a look...
These kinds of back-to-back jumps are extremely rare for Alphabet. In fact, the share price has only moved 4% on two consecutive days five times in the company's history.
That's not a big sample size. But we can still look at past performance to see what has happened after similar rallies...
When we lower the threshold slightly, we get 21 occasions when the price jumped 3% on back-to-back days. And Alphabet's stock went on an absolute tear following those cases. Take a look...
Alphabet is a great buy over the long term. The stock returns about 5% every three months, 11% every six months, and 23% in a year with a typical buy-and-hold strategy.
But those returns soar if you buy after a setup like today's. On average, GOOGL was up 12% in the three months following this signal. It returned 25% after six months... and a staggering 63% in a year.
Even better, this indicator has never failed in a one-year period. Historically, GOOGL is positive 100% of the time a year after these cases.
The stakes in the AI arms race couldn't be higher. But Alphabet is an innovator. And while we can't guarantee that it's ready to lead the pack, this price strength is a sign that it's starting to win over investors again.
If its past performance is any guide, the tech giant will rise to the occasion... And folks who buy today are likely to be handsomely rewarded.
Sean Michael Cummings
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