Alphabet has gone from AI loser to winner and back again, and its addition to the Dow Jones Industrial Average this past week has only seemed to make things worse. But there are plenty of reasons to be patient with the suddenly out-of-favor stock.

After hitting record highs of more than $400 in the first half of May, Alphabet has dropped around 15%. High-profile departures of artificial-intelligence researchers and an $85 billion equity raise have tested investors' nerves, culminating in a $225 billion fall in market capitalization on a single day on Monday, the company's worst-ever one-day loss in value.

Shareholders might have been hoping that Alphabet's addition to the Dow -- the announcement that it would replace Verizon Communications in the venerable benchmark came late Tuesday -- would act as a reminder of its strengths. S&P Dow Jones Indices, after all, cited Alphabet's AI products and exposure to "dynamic areas of the U.S. economy" as reasons for its addition. Instead, the stock dropped another 1% the following day.

The peculiarities of the 30-stock Dow industrials are likely to limit any benefit from the index inclusion. Because the Dow is a price-weighted index -- meaning stock prices rather than market capitalizations determine the weighting of each company -- few funds choose to replicate its composition. That means there is little or no boost from forced buying, unlike when a company is added to the S&P 500.

Often, the opposite happens. Nvidia and Amazon.com both joined the Dow in 2024. Nvidia fell 0.8% on the day of its addition and Amazon dropped 0.1%. There was little appreciable boost in the following weeks. In fact, Nvidia stock fell 21% over the following six months, although it has since more than recovered those losses.

The average stock added to the Dow gained just 0.4% in the 12 months following the announcement, according to Bespoke Investment Group data. Alphabet will be hoping that its Dow inclusion -- which came after the stock more than doubled in a year -- hasn't come after its peak.

Alphabet has bigger things to worry about than its Dow inclusion. The company's chief issue is an AI brain drain. John Jumper, a senior research scientist and Nobel Prize winner, said on June 19 he was leaving Google DeepMind -- Alphabet's AI backbone -- for Anthropic. His departure came shortly after Noam Shazeer, a vice president of engineering at Google, said he was leaving for ChatGPT developer OpenAI.

The loss of Shazeer is particularly galling as it is the second time he has left Google. A co-author of a seminal research paper that kicked off the AI boom, Shazeer quit the company in 2021 to start his own company after Google refused to release a chatbot he developed. Alphabet spent $2.7 billion in 2024 to bring him back and license his start-up's technology.

His loss comes at an inopportune time. Google's current top AI model is slightly weaker on benchmarking tests than the latest releases from Anthropic and OpenAI, according to research institute Epoch AI. There might be an even bigger competitive threat in the form of Chinese AI entrants undercutting the entire market. Companies like Z.ai are releasing capable models at costs that can be less than half those of American rivals.

The risk for Alphabet is that it ends up being squeezed between cutting-edge expensive models from Anthropic and OpenAI and the cheaper tier of Chinese AI. Data from Artificial Analysis on the intelligence of large language models places Z.ai's latest release in the top three globally, a first for a Chinese company and ahead of any of Google's AI models.

"Chinese companies such as DeepSeek, Alibaba, Minimax and Z.ai are increasingly important players," wrote Gavekal Research analyst Will Denyer in a research note. "This is a clear threat to U.S. model developers...when Chinese companies enter the room, profits typically make a swift exit."

But let's not get ahead of ourselves. For Alphabet, AI isn't just a stand-alone business -- it also drives other businesses. The company, for instance, reported 63% growth for its cloud-computing arm in the first quarter of the year, the strongest since it started disclosing the figure in 2019. TD Cowen analyst John Blackledge forecasts cloud revenue will grow at a 37% compound annual rate, rising from around $100 billion this year to $480 billion in 2031.

"We are just at the starting point of AI driving top line growth at Google Cloud," he explains. His price target of $475 for the stock suggests nearly 40% upside from a recent $341.77.

Defying fears it would be disrupted, Google's core search business also seems to be getting a boost from AI, with queries at an all-time high. The company has reported 900 million users for its Gemini AI, and its custom AI chips -- known as tensor processing units, or TPUs -- are generally recognized to be the most formidable competition to Nvidia on the market.

Alphabet is now trading at a forward price/earnings multiple of 23.6, compared with 20.4 for the S&P 500 and down from nearly 30 in February. If it gets any cheaper, it might be time to follow the example of the Dow and bet on Alphabet returning to the AI winners circle.

Write to Adam Clark at adam.clark@barrons.com

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(END) Dow Jones Newswires

June 26, 2026 01:15 ET (05:15 GMT)

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