Although the terms "bear market" and "bull market" are often used by investors, not everyone defines them in the same way, and it's not always entirely clear when a bear ends and a bull begins. A bear market is usually defined as starting when there's a drop of 20% or more from the market's high point, while a bull market is sometimes defined as starting after there has been a sustained rise of 20% from its cyclical low, with generally rising share prices -- but some won't say it's a true bull until after the market sets a new all-time high.
While the market, as represented by the S&P 500 index, has risen by more than 20% from its cyclical low, it hasn't etched a new record yet. So the jury is still out on if we're in a bull market. However, regardless of how long it takes the market to hit that milestone, I'm most excited for one stock in my portfolio to shine: Alphabet (GOOG 0.82%) (GOOGL 0.72%). I think it will be one of the best stocks for the coming bull market, and you should consider establishing a position in it too.
Advertising revenue will see a boom soon
Alphabet is highly exposed to one industry: advertising. About 78% of its revenue comes from ads on its Google platforms, YouTube, and Android. However, Alphabet's advertising revenue has been weak lately, falling by 0.2% in Q1.
This trend has been driven by the shaky economic outlook, which has had businesses looking to cut their expenses in any way possible. One of the easiest ways to do this is to trim their advertising budgets. When one business does this, it's not a big deal. But when the entire market reduces its marketing spending, the product (advertising space) loses its value. As a result, the companies selling ad space must make it cheaper to lure more advertisers to their platforms.
However, the reverse is true as well. Once advertising budgets open back up, a stream of money will pour in and increase demand for the product, driving up prices. This catalyst will be huge for Alphabet's stock and will allow its revenue growth to increase substantially.
Furthermore, once the price of ad space begins increasing, margins should improve, which will help out its net profit metric. This will allow Alphabet to increase its earnings faster than its revenue, which has not happened during the past few quarters.
While this will be a game changer for Alphabet, there's another business segment I'm more excited about.
Cloud computing is a crucial long-term initiative
Cloud computing is a massive trend in business and is only further propelled by the growing demand for artificial intelligence (AI) applications. Google Cloud offers its clients the ample computing resources they need to deploy AI in their businesses and perform general computing needs.
In Q1, Google Cloud's revenue rose 28% year over year and the segment turned its first operating profit, generating $191 million. Demand for Google Cloud's products will likely increase in Q2 thanks to AI interest, which should make the platform more profitable. Competitor Amazon Web Services posted an operating margin of 24% in Q1. If Google Cloud could reach that level of profitability, it could add another $1.6 billion to Alphabet's operating profit -- a 9% increase.
Plus, the cloud computing market is expected to grow significantly over the next few years -- Grand View Research estimates that it will reach $1.55 trillion in revenue by 2030. That's a massive revenue opportunity, and Alphabet is strategically positioned to capture its share.
Fortunately for investors, the stock isn't expensive right now either.
The stock hasn't gotten too expensive after its strong 2023 performance
Trading at 26 times earnings, investors might think Alphabet's stock looks expensive.
GOOGL PE Ratio data by YCharts.
However, that's based on its trailing earnings during a period when the company wasn't optimized for profits due to the weakness in the ad market. Based on its 2024 earnings projections, the stock trades at 19 times forward earnings. Though it's higher than it was at the start of this year, that's still a fairly low valuation for this stock based on its history, and a good value in general.
Alphabet has some crucial growth drivers on the horizon, and the stock has already started to move higher in response. Investors should take this opportunity to invest in Alphabet before sentiment changes, as it still trades for a fair price.
