By 10:30 a.m. ET on Tuesday, shares of Alphabet (GOOG, GOOGL) had climbed 2% higher. The upward trend followed a key decision by President Trump, who, as part of his first major move in a second term, issued an executive order to reverse a directive issued by his predecessor, Joe Biden. The earlier Biden-era order had aimed to establish federal standards for ensuring the safety of AI systems. It also required AI developers to submit safety testing results to the U.S. government before releasing their models to the public.
What the new Trump executive order does
The executive order signed by Trump effectively cancels the Biden administration's AI safety rules, removing the requirement for companies to provide data on model safety to the government. Though the exact financial impact of the Biden rules on companies like Alphabet is uncertain, the reversal is expected to cut compliance costs for major AI developers. This includes not just Alphabet, but also Microsoft, Amazon, and OpenAI.
Alphabet's Gemini AI is a key part of the company's offerings, especially in powering features such as quick answer searches on Google. If the new regulatory environment cuts costs, it could lead to better profit margins. This potential benefit likely contributed to the modest rise in Alphabet stock.
Alphabet shares currently trade at a price-to-earnings (P/E) ratio of 25.5, with the company projecting 17% long-term earnings growth. However, the company's aggressive investment in AI development is eating into free cash flow, which now represents only about 60% of its reported net income. At a current valuation of 43 times free cash flow, the stock appears pricey for the returns it may deliver.
For value investors, paying 43 times earnings based on free cash flow for a company projecting 17% growth is seen as too high a multiple. Based on this, the stock is not currently considered a strong buy. While the Trump executive order may offer some relief in terms of compliance and cost savings, the broader investment case for Alphabet remains uncertain at current prices.