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After rising about 58% in 2023, the uptrend in Alphabet (GOOGL) stock has continued into 2024. So far, shares of this technology giant are up over 23% year-to-date, outperforming the S&P 500 Index’s ($SPX) roughly 14% return.
While Alphabet stock has continued to trend higher, the company’s dominance in the digital advertising segment, growing cloud business, integration of artificial intelligence (AI) technology into its products, and innovation across various emerging tech fronts suggest that the momentum in its stock could sustain, making it a smart buy near the current price levels.
Here’s a closer look at why Alphabet stock might keep climbing.
Advertising Revenue Shows Strength and Resilience
Despite macroeconomic uncertainties, Alphabet's advertising revenue has demonstrated impressive strength and resilience. In the second quarter of 2024, Google’s ad revenues grew by approximately 11% year-over-year. Notably, Q2 marks the third consecutive quarter of double-digit growth in ad revenues, underscoring Google’s dominance in the digital advertising sector.
Google’s ad revenue growth was led by the strength of its Search and YouTube ads. In Q2, Google Search and other advertising revenues reached $48.5 billion, reflecting a 14% year-over-year increase. This solid performance was broad-based across various verticals, with retail contributing significantly.
Innovations in Search - including the integration of Generative AI for improved responses, and new search methods, such as AI overviews and visual searches through Lens - are enhancing user engagement and usage, which, in turn, is attracting more advertising dollars.
Besides Search, YouTube ad revenues grew by 13% year-over-year, driven by solid performance in brand advertising and direct response advertising products. As the leading video streaming platform, YouTube’s watch time is increasing, and the monetization rate of YouTube Shorts is showing healthy growth on a relative basis. The company has seen significant improvement in Shorts monetization, especially in the U.S. Moreover, the contribution from brand advertising on Shorts also remains strong.
While the company’s ad revenue faces tough comparisons in the second half of 2024, integrating AI into Search and the addition of 30 new ad features will drive higher usage and help the company benefit from increased advertising spending.
Further, higher user engagement on YouTube and improvement in Shorts monetization bode well for long-term growth. In addition, events such as the Olympics and elections could further boost Google’s ad revenues.
AI to Accelerate Cloud Business Growth
Google’s Cloud division has demonstrated impressive growth, fueled by its AI initiatives. In Q2, the Cloud segment achieved significant milestones, with quarterly revenues surpassing the $10 billion mark for the first time. Concurrently, the segment's operating profit exceeded $1 billion.
The Cloud segment’s year-over-year growth rate accelerated to 29%, up from 28% in Q1 2024 and 26% in Q4 2023. This growth in Cloud business was driven by robust demand for Google’s AI infrastructure and generative AI solutions, with Google Cloud Platform leading the charge, followed by Google Workspace offerings. The largest contributors to Google Cloud Platform’s growth were its infrastructure and platform services. So far this year, Google’s AI infrastructure and generative AI solutions for Cloud customers have generated billions in revenues, serving over 2 million developers.
Looking ahead, Google anticipates continued strong customer interest in its AI products, which will drive its client base. Additionally, its partnership with Oracle (ORCL) has significantly expanded their joint offerings to a broader customer base, which will support customer acquisition. With aggressive investment in the Cloud business and a growing number of its customers utilizing its generative AI solutions, Alphabet is well-positioned for future AI opportunities.
Alphabet to Enhance Shareholders’ Value
Alphabet’s solid financial performance has led the tech giant to return higher cash to its shareholders. In Q2, Alphabet repurchased $15.6 billion worth of shares, and in the first half of 2024, it bought back $31.7 billion worth of shares.
The company still has approximately $74.9 billion available under its share repurchase program. With its strong free cash flow generating capabilities, Alphabet is poised to enhance shareholder value through ongoing share buybacks.
Plus, the company launched its first-ever dividend payment earlier this year, at a rate of $0.20 per share.
Alphabet Stock: Analysts Recommend Strong Buy
Alphabet is set to deliver robust financial performance, driven by resilient advertising revenue and significant growth opportunities powered by AI in its Cloud and Search divisions. The company’s subscription revenue is also expected to rise, driven by increased paid subscribers for YouTube services.
The company’s higher revenues and productivity savings will enhance cash flows, supporting Alphabet’s shareholder-friendly initiatives, such as share buybacks and dividend payments.
This optimism is echoed by analysts, with most of them recommending a buy on Alphabet stock. Out of 44 analysts in coverage, 34 rate it as a “strong buy,” three as a “moderate buy,” and seven as a “hold,” resulting in a consensus rating of “Strong Buy.”
The average price target for Alphabet stock is $204.47, suggesting a potential upside of approximately 20% from its current levels.
On the date of publication, Amit Singh did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
