Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) faced an unusual setback when the stock dropped by over $100 billion following a mishap with its generative AI earlier in the year. Specifically, its Bard chatbot ad provided inaccurate information. Furthermore, analysts criticized the company’s AI search event for lacking details on responding to Microsoft’s (NASDAQ:MSFT) ChatGPT challenge in Feb.

Alphabet is in a favorable position, having recently opened Bard to the U.S. and UK public. This development marks a shift from the company’s previous cautious approach. It also shows Alphabet’s efforts to catch up in deploying speculative technologies and capitalize on the momentum in generative AI.

Google’s latest move complements its decade-long efforts in AI-enabled innovations. Despite concerns over market share and margin compression, Google’s current discounted stock price and the value of new opportunities generated from implementing generative AI capabilities outweigh the risks and offer potential for future growth.

Alphabet Sees AI as an Opportunity, Not a Threat

Google’s LaMDA-based chatbot, Bard, debuted in Feb. It is now available to the public in the US and UK as an “early experiment” to gather user feedback. Improvements to Bard and its deployment and monetization are crucial for Google’s search market share and demand for its generative AI capabilities in the cloud. In addition, Google has long integrated AI-enabled solutions into its offerings, including search, advertising, and cloud.

The total addressable market for cloud computing will expand with the increasing demand for generative AI workloads. Google’s introduction of Bard and LaMDA, following Microsoft’s strategy in monetizing OpenAI’s large language models, will attract additional enterprise cloud spending. This will create an incremental revenue stream for GCP and drive demand for adjacent cloud services.

Google’s Position Is Still Safe

OpenAI’s ChatGPT gained over 100 million users in just a few months, leading Google investors to worry about the company’s moat being breached. There are concerns that generative AI could erode Google’s market leadership in the online search market. That will put its core offering at risk.

However, recent data shows that Google’s market share has yet to experience any substantial impact from ChatGPT’s introduction. Additionally, the recent release of Bard and potentially other Google solutions powered by LLMs, such as LaMDA and PaLM, help alleviate concerns regarding significant market share erosion or displacement.

Although generative AI queries are more expensive than traditional queries, Google’s extensive market reach has the potential to provide a scale advantage. Furthermore, GCP’s reputation in the AI/ML community is driven by Google’s in-house developed “Tensor Processing Units.”

Microsoft’s Bing saw a 15% increase in page views and an 800% increase in app downloads in six weeks. However, it remains to be seen if it is a lasting trend. Much depends on whether users believe that AI can improve their search experience. As of Jan. 2023, Google remains the unchallenged leader in the search engine market. It holds a share of approximately 84.69%, while Bing and Yahoo had a market share of 8.85% and 2.59%, respectively, indicating that Google has not experienced a significant decline in its market share.

Plenty of Firepower

Amid the AI race, it is important for investors not to overlook the sheer size and magnitude of Alphabet. In essence, it is an umbrella organization for several smaller units.

In 2022, the company’s revenue streams were diverse. Over $282 billion came from Google search and other services. Network members (Adsense and AdMob) generated $32.78 billion, while $29.2 billion came from YouTube Ads and $26.28 billion from the Cloud. Finally, another $29 billion is from various other sources, such as Google Play, hardware devices, and other services.

Additionally, Alphabet has a division called Other Bets, which comprises several companies working on ambitious projects. These Other Bets are essentially a gamble on the company’s capacity to leverage artificial intelligence to solve complex problems more efficiently than startups. Waymo, Google’s self-driving car company, is perhaps the biggest potential money spinner for the company.

Alphabet has this privilege because of its substantial cash reserves. As of December 2022, Alphabet reported a free cash flow of $16.02 billion. Over the trailing twelve months ending in December 2022, the company’s total free cash flow was $60.01 billion.

GOOG Stock Is Attractively Valued

Conversational AI has the potential to revolutionize the search industry by integrating platforms like Google further into users’ daily lives. However, despite this potential, the market values GOOG stock at near-historic lows.

It is intriguing that prior valuations did not even account for the premium an AI-integrated Google offers potential investors. GOOG’s EV-to-EBITDA range over the past 10 years shows a minimum of 3.5, a median of 16.26, and a maximum of 21.61. The current valuation of 14.22 falls well below the median and maximum. GOOG’s PE ratio range over the past 10 years shows a similar trend, with a minimum of 8.37, a median of 27.13, and a maximum of 66.05, compared to the current ratio of 22.79.

The undervaluation of GOOG stock concerns given the potential of conversational AI to revolutionize the search industry. But investors need to understand a critical fact. Google has dedicated considerable time and resources to AI development. And the recent release of Bard is a testament to the company’s continued leadership in this field. Therefore, we believe that GOOG stock is undervalued and worthy of strong examination by investors.

Is GOOG Stock a Buy or Sell?

Microsoft may have debuted the first mass-market use of generative AI. But Google is a close competitor with deployment-ready services. This presents an opportunity for Google to establish a fresh trajectory of next-generation growth with generative AI monetization strategies. The rapid implementation of Bard will strengthen Google’s advancements in this subfield of AI, while also directing attention toward new growth opportunities.

Despite the promise of generative AI, the GOOG stock is trading at a discount compared to its historical levels. This may be due to prevailing macroeconomic headwinds and investors’ failure to assess potential risks and opportunities accurately. Nevertheless, I maintain a positive outlook on the longer-term prospects of GOOG stock.

On the publication date, Faizan Farooque did not hold (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.