/AI%20(artificial%20intelligence)/shutterstock_2242235005.jpg)
The dark clouds looming over the technology sector in 2022 appear to have lifted this year, thanks in large part to the artificial intelligence (AI) boom. Most industries can benefit from AI; however, the technology sector is capitalizing the most so far.
As a result, many popular tech firms have skyrocketed in value this year. So far in 2023, Alphabet (GOOGL) stock has gained 53.2%, outperforming the S&P 500 Index's ($SPX) return of 10.9%. Plus, analysts believe the stock has plenty of room to run higher from here, as it incorporates AI into its products to take advantage of this lucrative niche.
What's Going Right for Alphabet?
Alphabet has been integrating AI into its products since 2017, long before the current wave of AI hype swept the market. AI has always been a part of Google's technology, whether it's writing short responses or completing sentences as you type in Gmail. Even Google Maps and Photos uses this tech. CEO Sundar Pichai believes that with more powerful generative AI, it will be able to provide more advanced products to customers.
Alphabet's Google Search is the most widely used search engine. In the last five years, it has successfully maintained its market share of around 92%, contributing the most to its total revenue. This kind of market stronghold provides the company with a competitive advantage over its rivals - who have also questioned its monopoly time and again.
In fact, Microsoft (MSFT) CEO Satya Nadella recently testified against Alphabet in the ongoing antitrust trial with the U.S. Department of Justice. Nadella reiterated the government's accusation that Google's monopoly is driving competitors out of the search engine market, affecting the success of Microsoft's own search engine, Bing.
In its recent Q2, Google Search revenue grew 4.7% year over year to $42 billion. It accounted for 57% of total revenue, which stood at $74 billion. Another growth driver is the Google Cloud segment, which grew a staggering 28% in Q2 to $8 billion.
Advertising also contributes a sizeable portion to its total revenue. Its ad sales totaled $58 billion, accounting for 78% of total revenue. A relatively slow recovery in the ad market resulted in a 3% increase in Q2 over the same quarter last year. Nonetheless, Alphabet is the dominant player in digital advertising. According to BCC Research, the global digital advertising market could reach $1.3 trillion by 2027. The company's new Search Ads 360 update could help bolster its position in this market.
Overall, Alphabet's revenue has increased 155% in the last five years.
Adapting to Stiff AI Competition
While Google Search is the preferred engine worldwide, AI-powered products may challenge its dominance. In 2019, Microsoft made the first of many substantial investments in OpenAI, and this year, the company launched its AI-powered Bing and the Edge browser.
Alphabet recognized that it must up its game to compete with larger tech rivals who are rapidly expanding in the AI market. As a result, in early 2023, the company launched Google Bard, its AI-powered chatbot. However, Bard did not receive much positive market traction.
But with a strong balance sheet and a plethora of resources, Alphabet is capable of adapting to the fast-evolving AI world. It ended Q2 with cash, cash equivalents and marketable securities totaling $118 billion, while holding a long-term debt of $13.7 billion.
Moreover, at the I/O developers conference in May, Alphabet's CEO discussed the company's upcoming products with sole focus on implementing AI technology. Sundar Pichai said, "With generative AI, we’re taking the next step. With a bold and responsible approach, we’re reimagining all our core products, including Search.”
Analysts Expect More Upside from Alphabet
Analysts expect Alphabet’s revenue to increase from $282 billion in fiscal 2022 to $339 billion in fiscal 2024. In addition, earnings per share could jump from $4.56 in fiscal 2022 to $6.73 in fiscal 2024. The shares are currently trading at about 20 times forward earnings, which seems fair for a growth stock.
Out of the 33 analysts covering Alphabet stock, 25 have a “strong buy” recommendation, 3 suggest “moderate buy,” and five call it a “hold.” The stock has no sell recommendations.
Based on analysts' average price target of $148.73, Wall Street sees a potential upside of about 10% in the next 12 months.
The Verdict
All of Google's platforms, including YouTube, Gmail, and Google Search, have eventually become indispensable to global users. Now, I believe AI has the potential to be a huge catalyst for Alphabet's growth in the coming years. Notably, experts predict that the AI market could be valued at $2 trillion dollars by 2031.
At current levels - with a fair valuation, successful brands, and great long-term prospects - Alphabet may be one of the best growth stocks to own right now.
On the date of publication, Sushree Mohanty 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.
