Alphabet Is Primed for Strong Revenue Growth Thanks to These Businesses

Alphabet (GOOGL 1.08%) (GOOG 1.06%) enjoyed years of double-digit revenue growth, but through the first half of 2023, year-over-year revenue increased by only about 5% to $144.4 billion. Blame a slowdown in its advertising business for the decline in growth.

This, in turn, was a result of a deceleration in the broader ad industry, which is forecast to grow by only single digits in 2023 for the first time in 14 years. The uncertain economy of the past several months, caused by factors such as rising inflation, has contributed to the ad industry's woes.

Even so, Alphabet's stock soared in 2023 thanks in part to advances in artificial intelligence (AI) that the company introduced this year. But AI isn't Alphabet's only advantage. Two businesses within Alphabet are particularly well-positioned to enjoy rising revenue over the long term. Here's a look at both businesses.

YouTube is No. 1 in online video

YouTube is the first asset in Alphabet's possession poised for rising revenue. It's the largest online video service in the world, with more monthly visitors than Meta's Facebook and Instagram, Twitter, and Amazon combined.

In the second quarter, YouTube's ad sales grew 4% year over year to $7.7 billion, representing 10% of the quarter's $74.6 billion in total revenue. This is a turnaround from the first quarter's 3% year-over-year revenue drop due to the ad industry's slowdown.

Despite the softness in YouTube's 2023 results so far, the business has a bright future. The secular trend of consumers shifting from traditional linear television to streaming services means they are spending increased time on connected TV (CTV), which represents the fastest growing format in terms of where advertisers are spending their ad budgets.

Today, about 25% of every advertising dollar goes to television. CTV garnered $20.7 billion of those ad dollars last year, and that figure is expected to nearly double to $40.9 billion by 2027.

YouTube is reaching 150 million people in the U.S. via CTV, according to CEO Sundar Pichai, equivalent to nearly half the U.S. population. And Alphabet is looking for ways to increase that number. The company introduced YouTube Shorts, a TikTok competitor, in 2020, and it now has more than 2 billion monthly viewers. And YouTube will begin showing NFL games this fall.

Its subscription services are seeing strong growth, contributing to a 24% year-over-year increase in the company's other, non-advertising revenue, which hit $8.1 billion in second quarter compared to $6.6 billion last year. Subscription sales could increase, with industry forecasts estimating YouTube's global user base will grow by more than 30% over the next four years.

Google Cloud continues its double-digit growth

Alphabet's cloud computing division, Google Cloud, is the other key business boosting total revenue, and its trend of double-digit, year-over-year increases continues in 2023.

Data source: Alphabet. YOY = year-over-year.

This growth trend illustrates Google Cloud's success, and the business is now No. 3 worldwide in cloud-computing market share. To continue that success, Alphabet has infused Google Cloud with AI technology, which led Pfizer to adopt it to improve its cybersecurity, while Instacart is now using it to enhance customer service. 

The public cloud sector, where Google Cloud operates, is forecast to reach nearly $600 billion this year, according to research firm Gartner, and to exceed $700 billion in 2024. Those kinds of numbers should power continued sales increases for Alphabet's cloud business, whose first-half revenue of $15.5 billion puts 2023 on pace to exceed last year's haul of $26.3 billion.

More reasons to invest in Alphabet

The strengths of YouTube and Google Cloud come on top of Alphabet's excellent financial health. The company's second-quarter free cash flow was $21.8 billion, and $71 billion over the trailing 12 months.

Its second-quarter cash, cash equivalents, and marketable securities of $118.3 billion alone exceeded the quarter's liabilities of $115.9 billion. Total assets were $383 billion at the end of the second quarter.

The current slump in digital advertising is expected to reverse in 2024 with a return to double-digit ad spending growth, which should bolster Alphabet's ad sales. Couple this with multi-year expansion in CTV advertising and cloud computing, and YouTube and Google Cloud should see strong revenue growth for years to come.

Add to this Alphabet's strong financial health, and the company has the ingredients for an excellent long-term investment.