Alphabet's AI Dilemma: Where's the Killer App?

If you didn't already know by now, artificial intelligence (AI) is the word of the year in technology.

Following the launch of OpenAI's ChatGPT late last year, investors have been clamoring for a piece of any stock that can claim a connection to AI, and AI stocks seen as pure plays on the new technology like C3.ai have skyrocketed on that buzz, though they've also come down more recently.

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) has noticed. The tech giant has been in the line of fire since ChatGPT's debut, and Google's management has taken the opportunity to make the case for its own AI investments at every turn. CEO Sundar Pichai has reminded investors that Alphabet pivoted to being an AI-first company seven years ago, and it acquired DeepMind, the highly regarded British AI research lab, back in 2014.

A digital brain over a tablet.

Image source: Getty Images.

On the first-quarter earnings call, management was again happy to bang the drum on AI, as there was no shortage of references on the call to the fast-evolving technology. That includes developing "state-of-the-art language models," including its new conversational AI service Bard, empowering developers and other creators, and allowing companies to take advantage of its AI tools.

Management discussed AI's role in advertising and Workspace, the suite of apps that includes Gmail, Docs, and Sheets, but much of the discussion seemed vague.

In search of the killer app

While Alphabet has been using AI for several years, it has yet to find a transformative application for it, the way OpenAI did with ChatGPT, and as Microsoft (NASDAQ: MSFT) appears to be doing across several of its product lines.

Most of the improvements the company has made from AI seem to be coming internally, rather than from customer-facing products. For example, Pichai shared that the company has been using large language models (LLMs) for the past few years to enhance search quality, and CFO Ruth Porat noted that the company is even using AI in the way it runs the finance organization.

The problem with those uses is that they're not going to move the needle on the business or wow users. It's not the kind of transformative technology investors imagine when they hear AI.

It's understandable that Alphabet was reluctant to add the kind of chatbot interface to Google Search that Microsoft's Bing now has, but now that that technology is out there, the company needs to think more creatively about how it can use AI.

At this point, Alphabet still looks like it is playing defense, while Microsoft has embraced the role of a swashbuckling disruptor in search thanks to its new AI capabilities.

The Windows maker also talked up its AI deployments last quarter, but the company offered a slew of concrete examples to back it up. On LinkedIn, for example, writers can get personalized suggestions from generative AI tools, and employers can use them to help craft job descriptions.

GitHub's AI-based Copilot gives suggestions for code. Teams uses AI to offer real-time translations in 40 languages, and Azure's OpenAI service offer using access to generative AI tools like GPT 3.5, Codex, and DALL-E 2 to create text, code, and images. Microsoft now has more than 2,500 Azure OpenAI customers, up more than 10 times from its previous quarter, including top brands like Mercedes-Benz and Shell, showing the service is fast gaining adoption.

And, of course, the new Bing is the AI-driven product Microsoft is most excited about, noting on its earnings call that daily installs are up four times since its launch in February.

A seven-year whiff

Alphabet touts its years of investments in AI as evidence of its strength and capabilities, but what if it's really the opposite? That time and effort isn't an asset, but a reflection of its inability to execute and ship real products or leverage the research of DeepMind and Google Brain, with which it just merged.

Back in 2016, Pichai declared Google an "AI-first" company and made investments to back up that conviction, also betting on then-new products like the Pixel phone and Google Assistant, which have both flopped. However, with OpenAI and Microsoft capturing the early lead in AI, it seems that Pichai may have been right about the direction of AI, but missed on the execution.

While Microsoft CEO Satya Nadella is eager to take on Google Search in a "new race," Pichai still sounds cautious, promising investors that the company will test and iterate, and seems committed to incrementality rather than transformation.

Alphabet may yet have a killer app up its sleeve, but at this point, despite spending billions on research and much talk about AI, investors are right to demand more from the search giant than it has so far delivered.

10 stocks we like better than Alphabet
When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now... and Alphabet wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of April 24, 2023

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Microsoft. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.