While artificial intelligence (AI) has done wonders for several tech giants this year, tech behemoth Alphabet Inc. (GOOG) has struggled to match the market’s momentum, with its stock trailing behind the broader market. The company faces multiple headwinds, both on the business front and from regulatory pressures. Alphabet suffered a major blow after losing a critical antitrust case over its exclusive search deals with Android and Apple (AAPL) devices.
Adding to the heat, reports suggest Alphabet could be forced to spin off key assets like its Chrome browser and Android operating system. Such a breakup would strike at the heart of Alphabet’s dominance, threatening to disrupt its leadership in the search and digital landscape and leaving the tech giant facing an uncertain future. Compounding the problem is Alphabet’s lingering reputation of lagging behind in the AI race.
Despite ramping up its AI game, Alphabet still finds itself in the shadow of Microsoft (MSFT)-backed OpenAI, struggling to reclaim the spotlight in the AI race. Even its solid Q2 earnings weren’t enough to shift market sentiment.
With regulatory battles and competition mounting, Alphabet has a tough road ahead to win back investor confidence. Yet, as the company prepares to reveal its Q3 results later this month, Piper Sandler remains highly bullish, citing untapped potential and strong performance drivers that could make this “Magnificent Seven” underdog a breakout star.
About Alphabet Stock
Valued at a massive market cap of $2.06 trillion, Mountain View-based Alphabet Inc. (GOOG) serves as tech conglomerate Google’s parent company, driving continuous innovation across various industries, including healthcare, entertainment, AI, and even autonomous driving. The tech giant has seamlessly woven AI into its core offerings, including Gmail, Google Maps, and Photos, enhancing user experiences and establishing new benchmarks for efficiency and convenience.
Alphabet empowers its diverse subsidiaries, primarily divided into Google Services, Google Cloud, and Other Bets, to chase new opportunities while leveraging shared resources. With Google Services leading the charge, the company reigns supreme in the search arena, which serves as its primary revenue driver. At the same time, Google Cloud delivers state-of-the-art enterprise solutions, and Other Bets fuels innovation with exciting ventures like Waymo's self-driving cars and DeepMind's cutting-edge AI research.
This dynamic framework allows Alphabet to stay at the forefront of technological advancement while fostering growth across multiple sectors. Yet amid antitrust battles and rising competition in the search arena, the company has pulled back nearly 14% from its July peak of $193.31.
With the shares up almost 19% over the past year and 18.3% on a YTD basis, GOOG stock is lagging behind the broader S&P 500 Index’s ($SPX) healthy gains of 33.6% over the past year and 22.5% on a YTD basis.
Alphabet paid its shareholders a first-ever dividend of $0.20 per share on June 17, marking the company's inaugural foray into shareholder returns. The company’s forward annualized dividend of $0.80 per share reflects a modest 0.48% yield.
From a valuation standpoint, GOOG stock is priced at just 21.54 times forward earnings, much cheaper than its “Magnificent Seven” peers like Tesla (TSLA) and Nvidia (NVDA).
Alphabet Slides After Q2 Earnings
Alphabet’s Q2 earnings report, released on July 23, shattered Wall Street expectations, showcasing the tech giant's robust growth. The company reported total revenue of $84.7 billion, reflecting a nearly 14% year-over-year increase, largely driven by its thriving Search and Cloud segments. Earnings per share (EPS) soared to $1.89, up 31.3% from the previous year and comfortably surpassing consensus estimates.
One of the highlights was the remarkable performance of the Google Cloud segment, which achieved a significant milestone by surpassing $10 billion in quarterly revenue while generating $1 billion in operating profit for the first time. Additionally, the Search segment reported $48.5 billion in revenue, up 13.8% year over year.
Alphabet’s ad revenue climbed to $64.6 billion, marking an 11% increase from $58.1 billion in the same quarter last year. The Other Bets segment, which includes its self-driving car venture Waymo, generated $365 million in revenue, up from $285 million in the same quarter last year, further showcasing the company's diverse revenue streams and innovative pursuits.
However, GOOG plunged over 5% on July 24, largely due to disappointing YouTube ad revenue of $8.7 billion, which fell short of expectations.
What Do Analysts Expect For Alphabet Stock?
Looking ahead, analysts are forecasting a significant 31.7% year-over-year increase in earnings to $7.64 per share for fiscal 2024, followed by an additional 13.1% rise to $8.64 per share in fiscal 2025. The company is slated to announce its fiscal 2024 Q3 earnings results on Tuesday, Oct. 29.
Despite a lukewarm response from investors to the company’s Q2 results and recent regulatory challenges, Piper Sandler named GOOG a “Top Pick” in the internet space ahead of earnings. The firm is forecasting $86.5 billion in revenue and $26.5 billion in operating income for Q3.
“Ad checks were positive, and Gemini integration into Search is driving higher spend by improving efficiency,” wrote the firm in a note. “We view antitrust fears as priced in. Plus, we like new CFO Ashkenazi and see an opportunity to lower opex/head."
Overall, Wall Street has high conviction in GOOG stock, maintaining a consensus rating of “Strong Buy.” Of the 47 analysts offering recommendations, 36 advise a “Strong Buy,” three suggest a “Moderate Buy,” and eight analysts maintain a “Hold.”
The mean price target for GOOG is $202.24, indicating expected upside potential of around 21.3% from current levels.
On the date of publication, Anushka Mukherji 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.
