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Sitting at a market cap of $2.08 trillion, Alphabet (GOOGL), the parent company of Google, is one of the most influential tech giants in the world. While Google remains its primary revenue generator, Alphabet has expanded into cloud computing, hardware, autonomous vehicles, healthcare, and even emerging technologies, which fall under its "Other Bets" segment. The company's emphasis on artificial intelligence (AI) has been a major catalyst for innovation and revenue growth across its platforms.
Alphabet's search engine continues to be the focal point of its business model. However, Google Search's monopoly has been called into question several times. The U.S. Department of Justice and European regulators have intensified antitrust scrutiny of its dominance in search and digital advertising. The upcoming trial in April will determine the future of Google Search.
Nonetheless, Alphabet had a fantastic year in 2024, with the most recent third-quarter results indicating strong growth in its core businesses. So far this year, GOOGL stock is up 21%, trailing the Nasdaq Composite's ($NASX) gain of 26.6%. Wall Street thinks the stock has more upside, and is a "strong buy." Let's find out why.
AI Serves as a Growth Engine For Alphabet
In the third quarter, Alphabet reported total revenue of $88.3 billion, a 15% increase year on year. Google Search contributed $49.4 billion, or approximately 56% of the company's total revenue. This represents a 12% increase in search revenue over the same quarter the previous year. Net earnings per share increased 36.7% to $2.12. Revenue and earnings significantly exceeded analysts' expectations.
AI has been central to Alphabet’s strategy. The integration of AI into Google Search has substantially boosted the relevance of search results, which in turn enhances the performance of its ads.
Although competitors such as Microsoft (MSFT) (with Bing and ChatGPT-powered search) and new entrants are vying for a share of the market, Alphabet's unparalleled scale, user engagement, and ad capabilities ensure that Google Search remains the world's dominant search engine.
Diversification Beyond Search
In addition to Google Search, YouTube has emerged as a significant revenue generator. YouTube ad revenue increased 12% in the quarter to $8.9 billion.
The increasing popularity of short-form videos on YouTube Shorts, which receives 70 billion daily views, is contributing to this growth. As video consumption grows, YouTube is establishing itself as a formidable competitor to platforms such as TikTok and Meta’s (META) Instagram Reels.
Alphabet's AI infrastructure has also expanded Google Cloud's offerings, which now include cybersecurity and data analytics tools. Google Cloud is currently ranked third, trailing Amazon's (AMZN) AWS and Microsoft Azure in the global cloud computing market. Google Cloud reported $11.4 billion in revenue, up 35% from the prior year quarter.
On the Q3 earnings call, Alphabet CEO Sundar Pichai discussed the company's ongoing efforts to lead in AI and sustainability. Alphabet is making significant investments in AI infrastructure, including key projects in the United States, Thailand, and Uruguay.
Alphabet's "Other Bets" segment includes its investments in cutting-edge technologies such as self-driving cars (Waymo), healthcare (Verily), biotechnology (Calico), the internet (GFiber), and AI research (DeepMind). Many of these ventures are still in their early stages and are unprofitable, but they reflect Alphabet's long-term strategy of investing in disruptive technologies that have the potential to diversify its revenue streams. In the third quarter, the Other Bets segment generated $0.38 billion in revenue, although it is still operating at a loss.
The company's cash, cash equivalents, and marketable securities totaled $110.9 billion, highlighting its strong financial position. With a debt-to-equity ratio of just 0.04 and a free cash flow balance of $17.6 billion, the company has the ability to return money to shareholders through dividends and share repurchases.
The company paid out a total of $1.2 billion in dividends during the quarter. It pays a forward yield of 0.47%, and the forward payout ratio of 8.9% indicates plenty of room for dividend growth.
Analysts that cover GOOGL stock predict earnings to increase by 38% in 2024, followed by another 11.6% in 2025. Alphabet’s stock is currently trading at 21 times forward 2024 earnings, which is attractive compared to peers like Amazon (40x) and Microsoft (32x).
What Does Wall Street Say About GOOGL Stock?
Overall, Wall Street rates GOOGL stock a “strong buy.” Of the 50 analysts covering the stock, 40 rate it a “strong buy,” while three recommend a “moderate buy” and seven recommend a “hold.”
Its mean target price is $210.61, which implies an upside potential of 24.4% from current levels. Plus, its high target price of $240 suggests that the stock could rise as high as 41.7% over the next 12 months.
The Key Takeaway
Google Search accounts for half of the company's revenue. Alphabet may face pressure due to its uncertain future with the antitrust trial. However, it is commendable how Alphabet continues to leverage AI and cloud computing for growth, even amid regulatory challenges.
While the upcoming trial next year will determine Alphabet's decision on Search, the company remains a key AI stock to watch as it continues to shape the digital economy while navigating through the challenges.
