There has been no shortage of excitement for shareholders of Alphabet (GOOG 1.82%) (GOOGL 1.79%) this year.
The tech giant entered the year in a code red, scrambling to come up with a response to OpenAI's ChatGPT. Since then, the battle for the future of artificial intelligence (AI) has only heated up as Microsoft, which has invested $13 billion in OpenAI, launched a new version of Bing, powered by ChatGPT technology.
After stumbling the first time it introduced Bard AI, its own AI chatbot, Alphabet redeemed itself at its I/O Conference in May, and the stock has surged since then. Year to date, Alphabet has been a big winner, up roughly 40%, but Wall Street thinks it could have more gains in store.
Nearly every Wall Street analyst following the stock gives it a buy rating, according to TipRanks, with the average analyst giving it a price target of $130.77, representing just 7% upside. But one Wall Street analyst sees the stock going all the way to $160 in the next year, for a 31% gain.
That's Ross Sandler of Barclays, who raised his price target from $150 to $160 for the Google parent back in February, after its fourth-quarter earnings report, and he has reiterated his rating since then.
At the time, Sandler noted that in spite of below-consensus results in revenue and operating income in the quarter, the company was convincing on efficiency improvements. And he expected the stock to "re-rate higher" as its growth begins to reaccelerate and margins improve when the ad market starts to recover and comparisons with the year-ago period get easier.
With Alphabet facing a number of challenges and the stock already up nearly 40% this year, a lot would seem to have to go right for it to tack on another 31%. Let's look at some of the assumptions embedded in the $160 price target.
Image source: Getty Images.
Revenue growth needs to reaccelerate
Not only is Alphabet facing pressure from Microsoft and OpenAI, but the new challenge in search also comes as the company's revenue growth has nearly ceased. Revenue grew just 3%, or 6% in constant currency, to $69.8 billion, and operating income fell 13% to $17.4 billion.
In order for the stock to recover, it's not enough for the company to demonstrate AI capabilities, it also needs to jump-start revenue growth.
The good news is that the worst of the tech recession seems to be behind us. News about layoffs has quieted down since the beginning of the year, a sign that the companies have made the necessary cuts and are ready to focus on growth again. The gains in the Nasdaq this year also seem to reflect the recovery in the sector.
Alphabet needs to defend its market share in search
The launch of ChatGPT has posed the biggest threat to Google since it took the lead in search more than two decades ago. Microsoft sees an opportunity and CEO Satya Nadella is putting his foot on the gas, focusing on grabbing market share in search with Bing. The company will soon integrate Bing into ChatGPT, taking another step in building out a viable search competitor.
For Alphabet to lose significant share in search would be catastrophic. The company brings in a majority of its revenue and profits from search, and its near-monopoly in the category has long been regarded as ironclad.
Beyond the risk of losing share to Bing, there's also the risk of AI disrupting the search-based advertising model, though Google is planning to experiment with ads in its chatbot search, much like Microsoft has.
Can Alphabet stock hit $160?
In addition to growing revenue and protecting its market share in search, Alphabet also needs to return to profit growth. That's expected to happen in the current quarter, but the stock has gotten pricey in this year's rally, and now trades at a price-to-earnings ratio of 27, which has come even as earnings have fallen.
Climbing to $160 a share would represent an all-time high for Alphabet, and getting there in the current economic environment won't be easy. If the company can execute on the objectives listed above and top expectations, it has a chance to get there, but the risks also grow as the stock gets pricier.
With the AI revolution just starting, Alphabet has growth opportunities but also plenty of downside risk as it faces off with Microsoft and OpenAI.
