Alphabet's cloud event Tuesday could justify the stock's recent records and further upside
Shares of Alphabet are on the verge of a possible breakout ahead of the company's three-day Google Cloud Next conference in Las Vegas, where artificial intelligence will be a major theme. Our focus will be on Google Cloud CEO Thomas Kurian's keynote around noon ET on Tuesday as we continue to see cloud innovation and AI integration as keys to further upside for the stock, which has certainly tested our patience this year. Google's generative AI large language model (LLM), Gemini, is what we're most interested in because of its importance in Google Cloud's battle with Microsoft 's Azure and Amazon 's AWS — both of which maintain significantly greater market share. Ahead of the keynote, Google announced custom Arm-based chips, following similar efforts from Amazon and Microsoft. It's no secret that Alphabet — among our Super Six mega-caps, which also include Apple , Amazon, Meta Platforms , Microsoft and Nvidia — has been our least favorite. We started 2024 trimming all of them after last year's powerful rally. Shortly after the trade, Alphabet shares ran into a brick wall after some advertising weakness surfaced in fourth-quarter results and was followed by a controversy over Gemini's image generator that caused the company to pull the tool. After bottoming in early March, shares soared to all-time highs on April 1. We made a second Alphabet trim that day in recognition of the run. We kept a smaller position because we know that Alphabet has the financial firepower and talent needed to turn things around. Management just needs to execute. Jim Cramer said on CNBC on Monday, "I have not been all that optimistic about Google's prospects versus Microsoft versus Amazon." However, he added that Kurian's keynote will be important. It's kind of a reset. The conference is expected to show that "Google is not being left behind, not being troubled by Search," Jim said. "This is the moment when the Cloud is growing in both financial and sentiment importance, and I have to believe it's going to move the stock higher." The timing of the annual event is also interesting. Bank of America said it comes only about 7½ months after last year's gathering. The BofA analysts think it might have to do with management's excitement to share new advancements or even unveil new AI-powered offerings. Other notable speakers at this week's conference include Palo Alto Networks CEO Nikesh Arora, Anthropic co-founder and CEO Dario Amodei, senior AI specialist at Ford Yao Ge, and Nvidia's director of generative AI Nik Spirin. (Palo Alto and Ford are also Club stocks.) Many others will be there as well to help support Google's efforts to compete in the cloud or to better leverage the cloud and AI tools to further enhance their own businesses. GOOGL YTD mountain Alphabet YTD With shares hovering near all-time highs, there is certainly a lot riding on this week's event. Many investors have soured on Alphabet, but few have truly counted them out of the AI race. We count ourselves among them. Tuesday will be a big test for the company as management looks to silence the naysayers. Alphabet has dropped the ball to some extent over the past few quarters and must show it's still very much a leader in the AI race. That said, we expect Tuesday's AI conversation to be limited to how it relates to Google Cloud. With the company's Google I/O developer conference, set for May 14, we wouldn't be surprised if some non-cloud AI announcements were being guarded until then. Outside the events, we also want to highlight some positive findings from Oppenheimer, which raised its Alphabet price target to $185 per share from $172 on Sunday. According to an Oppenheimer consumer survey, "search remains the best at satisfying consumer use cases, with genAI a complement vs. substitute to search." That's important because a big concern surrounding Alphabet's stock is that generative AI offerings such as ChatGPT from Microsoft-backed OpenAI, Claude from Amazon-backed Anthropic or Google's own Gemini would displace search to some extent. The advertising/monetization model around AI has not been established yet. But we know that Google's bread and butter is contextual ads severed up via search real estate. The Oppenheimer analysts added that their survey suggests that "contrary to investor fears that genAI could replace search, survey results suggest the use of AI assistants could increase search frequency." The survey also indicates that if Apple were ordered by regulators to remove Google as the default search engine on its devices, most users would either choose Google if they were provided a list of options or actively go and download the Chrome app to search with Google. If this default status were removed, Alphabet would also save billions of dollars. It's estimated that Google pays $18 billion to Apple each year to be the default search engine. While we're speculating, it remains to be seen if Apple will choose Alphabet as its partner for generative AI implementation as media reports have suggested as a possibility. We would like to hear something on this front at Apple's Worldwide Developers Conference (WWDC) in June. While a collaboration between the two could certainly make sense given the vast amount of data Alphabet can deliver thanks to search, Apple, no doubt, does not want to be at the mercy of any company. Apple has been working on its own LLM called (ReALM), which stands for reference resolution as language modeling, and developers argue its smallest models perform comparably to GPT-4 from OpenAI, adding that larger models "substantially" outperform GPT-4. (Jim Cramer's Charitable Trust is long GOOGL, AAPL, AMZN, META, MSFT, NVDA, PANW, F. See here for a full list of the stocks.) 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