Alphabet‘s (NASDAQ: GOOGL) (NASDAQ: GOOG) stock has dipped 7% in the recent month, a result of the tech sector’s general retraction combined with a pessimistic outlook on the company’s Q2 2024 earnings. Nevertheless, this setback has only enhanced its allure, with a current price-to-earnings (P/E) ratio of 24.
The company’s exceptional long-term prospects render this slight decline an exaggerated response. Alphabet’s primary revenue source, advertising, continues to be a highly profitable domain. Concurrently, substantial investments in artificial intelligence (AI) over the past year are starting to pay dividends, exemplified by the remarkable growth of Google Cloud.
Alphabet is embarking on an upward growth trajectory, and its stock now presents a compelling opportunity. Surpassing $61 billion in free cash flow signifies extensive financial capabilities to fuel further business expansion.
Here is why Alphabet’s stock may pave the way for long-term prosperity.
The Resilient Core Business
Alphabet unveiled its Q2 2024 earnings on July 23. Revenue soared by 14% year over year to $85 billion, surpassing Wall Street estimates by $450 million. Operating income surged by 26%, driven by considerable advancements in its advertising sector and Google Cloud.
Although the quarter showcased positive results, post-earnings results saw Alphabet’s stock gradually decline in after-hours trading. Despite excelling in multiple aspects, the firm fell short in its YouTube advertising segment. While YouTube ad revenue climbed by 13% year over year to $8.66 billion, it failed to meet the projected $8.93 billion.
Nevertheless, Alphabet’s advertising arm remains a compelling reason to invest in its stock. Google ads contribute to 69% of the company’s total earnings. This sector (inclusive of YouTube revenues) displayed an 11% sales growth year over year in Q2 and bolstered Google Services’ operating profit by an impressive 27%.
Alphabet’s advertising division remains an immensely lucrative segment, fortifying its cash reserves and expanding its reach into other technological domains.
Diversification through Google Cloud
Alphabet has been previously criticized for being overly reliant on digital advertising for its revenue stream. However, it is gradually diversifying. Over the past year, the company has intensified its AI expansion efforts, integrating various generative tools into Google Cloud.
In Q2 2024, Alphabet’s capital expenditures rose to $13 billion, marking a 91% increase from the previous year as it broadened its AI capabilities. CEO Sundar Pichai highlighted in a recent conference call that its AI ventures are already “driving new growth.”
Pichai elaborated, stating, “Our [AI] infrastructure and generative [AI] solutions for cloud customers have already generated billions in revenues year-to-date, engaging over two million developers.”
Google Cloud’s growth reflects Alphabet’s success in AI, with revenue and operating profit skyrocketing by 29% and 196%, respectively, from the preceding year. Google Cloud secures the third-largest market share in cloud computing, trailing behind Amazon Web Services and Microsoft’s Azure. Nonetheless, Alphabet is rapidly catching up to its competitors, surpassing both platforms in cloud expansion last quarter.
Google Cloud is on course to carve a more substantial role within Alphabet’s operations, broadening revenue sources and fostering two immensely profitable divisions.
Reevaluating Alphabet’s Value Post-Wall Street Response
A recent downturn has driven Alphabet’s P/E ratio down to an attractive 24. By comparison, Microsoft and Amazon boast significantly higher figures at 37 and 51, respectively.
P/E serves as a valuable valuation metric derived from dividing a firm’s stock price by its earnings per share. It proves useful in determining whether a stock is reasonably priced or overvalued. Typically, the lower the P/E, the greater the potential bargain.
Data by YCharts,
However, the P/E ratio alone does not always unveil the complete narrative. Besides presenting lower figures than its major counterparts, Alphabet’s current P/E stands below its ten-year average for the metric, rendering 2024 one of the prime moments to purchase.
Alphabet has garnered a reputation for delivering substantial growth, with its shares climbing approximately 490% over the past decade. The company has minted numerous millionaires during its tenure. Nonetheless, the era of AI emergence could propel future stock growth, potentially offering a path to millionaire status with astute investments.
Bottom Line: Considering an Investment in Alphabet
Before considering Alphabet stock, analyze the following:
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