The list of trillion-dollar companies is fairly short; there are only six currently. But only a few of them look like screaming buys right now. One is Alphabet (GOOG -0.75%) (GOOGL -0.77%), the parent company of Google and many other brands.
Alphabet looks situated to take advantage of a couple of trends that should emerge in the next few years better than any of its competitors, giving it an incredible upside. But what are these trends? You'll have to continue reading.
Alphabet's advertising wing hasn't had the best run
Alphabet is one of the world's largest advertising companies, and customers pay Alphabet to post ads in places that are the most relevant. It doesn't matter if it's on Google Maps, a search result, or YouTube (which Alphabet also owns); Alphabet's media reach is unparalleled. This makes Alphabet a must-spend area for companies actively participating in an advertising campaign.
However, as the economic outlook worsened, those funds dried up. As a result, Alphabet's advertising revenue has grown fairly slowly, only increasing at a 3.2% pace companywide and a 4.5% rate for YouTube.
This is historically slow for Alphabet, but when the economic outlook improves, this will become a no-brainer advertising location for everyone. With Google being the default search engine for practically everyone and YouTube holding the highest percentage of U.S. screen time among streaming companies, it's well positioned for a recovery.
Alphabet also has significant investments in the artificial intelligence (AI) world. Whether it's the Google Cloud cloud computing division (which 70% of generative AI unicorns utilize) or the various AI tools Alphabet has already developed, it's a fantastic investment for the rollout of AI.
But, with Alphabet being as large as it is, it's the target of an antitrust lawsuit that alleges Google engaged in exclusionary conduct by eliminating competitors. While it's uncertain what this outcome will be, it's unlikely Alphabet will be split up, although the situation is worth monitoring.
The anticompetitive allegations present one of the few bear cases for Alphabet, and they do not hold much water. As a result, I'm quite bullish on Alphabet stock.
But is it a great buy now?
Management has taken steps to improve its profitability
Because Alphabet's business isn't quite firing on all cylinders due to advertising weakness, it isn't optimized for profits. However, Alphabet took steps to lay off nonessential employees earlier this year while still hiring for technical roles to fuel its AI research. This trend can be seen in Alphabet's operating margin, which drastically improved over the past few quarters.
GOOG Operating Margin (Quarterly) data by YCharts
Because of this significant improvement, Alphabet's trailing earnings metrics aren't appropriate to value the company, so we need to use forward earnings. This has some dangers, as the metric relies on analysts' projections. But, we can determine future expectations by comparing its trailing multiple to its forward multiple.
GOOG PE Ratio data by YCharts
At just shy of 25 times forward earnings, Alphabet isn't the cheapest stock around. But that valuation implies about 20% earnings growth next year, which would be an outstanding year.
Barring any significant government action, I wouldn't be surprised if Alphabet maintains its 30-ish times earnings multiple, which means the 20% earnings growth would go straight to the stock price. But that's just the beginning with Alphabet. With Google Cloud and AI offering massive upside, these two will push Alphabet into its next growth phase, offering much greater than just a 20% return in one year.
As a result, I think Alphabet is an incredible buy right now, as its upside is incredibly high, with two major catalysts influencing it.
