As the world's fourth-most valuable company with a market cap of nearly $1.7 trillion, it would be difficult to overlook Alphabet's (GOOG 9.96%) (GOOGL 10.22%) stock as a potential investment. The company's shares climbed 155% over the last five years, outperforming the Nasdaq Composite and S&P 500 indices.
Potent brands such as Google, Android, YouTube, Chrome, and more attracted billions of users and have made it challenging for most consumers to go a single day without using an Alphabet product. The company's massive user base paved the way for it to become a powerhouse in digital advertising, a sector projected to hit $680 billion in spending this year.
Alongside a promising venture into artificial intelligence, Google's parent company is an attractive investment. So, here are three green flags for Alphabet's future.
1. A recovering ad business
Macroeconomic headwinds in 2022 brought declines across the tech market. Spikes in inflation forced companies to introduce cost-cutting measures, with advertising one of the first things to go. As Alphabet's digital ad business makes up the majority of its revenue, the company was hit hard by market challenges. In the fourth quarter of 2022, Alphabet's revenue rose 1% year over year, missing analysts' expectations by $440 million.
However, easing inflation and various restructuring moves seem to have Alphabet's ad business back on a growth path. In its latest quarter (Q3 2023), the company posted revenue growth of 11% year over, hitting close to $77 billion and beating Wall Street forecasts by $980 million. The solid gains came alongside 11% and 12% revenue rises in Google Search and YouTube ads.
Improvements in Alphabet's ad business are positive as we head into 2024 and could see the company flourish next year alongside other exciting ventures.
2. Alphabet has massive earnings potential in AI
The AI market exploded this year, with the industry valued at $137 billion and projected to expand at a compound annual growth rate of 37% through 2030 (per Grand View Research). Countless companies restructured their businesses to prioritize AI development in an effort to carve out their place in the high-growth industry. While Alphabet is no stranger to the technology, describing itself as seven years into its "journey as an AI-first company," the tech giant ramped up investment in the market in 2023.
Meanwhile, the company has massive earnings potential in the sector. Alphabet has nine products with over a billion users, with YouTube, Android, and the many platforms under Google presenting almost endless possibilities to monetize its AI venture.
The tech giant will launch a highly anticipated large language model in 2024 called Gemini. The platform is expected to be competitive against OpenAI's GPT-4 and could boost multiple areas of Alphabet's business. Gemini will likely allow Alphabet to bring advanced AI upgrades across its different services, including more efficient advertising, new AI tools through Google Cloud, updated features on productivity platforms like Gmail and Google Docs, improvements on YouTube, and a Google Search experience that's closer to ChatGPT.
Alphabet has the user base, brand recognition, and funds to go far in AI. It could be wise to invest now before it's too late.
3. Stellar financial gains that make its stock a bargain
Alphabet's annual revenue soared 107% in the last five years. Comparatively, Microsoft's rose 68% and Apple's 47% in the same period. Meanwhile, Alphabet's operating income jumped 130%, which is also higher than the same metric for competitors Microsoft or Apple. The company built a highly reliable business. Its significant market share in advertising might make it vulnerable to economic fluctuation, but it is unlikely to affect growth over the long term.
Moreover, Alphabet's year of recovery in 2023 saw its free cash flow increase by 30% to over $77 billion. The rise suggests the company has the funds to overcome any potential headwinds and continue investing in its business. Its performance this year also brought its price-to-free-cash-flow ratio to an attractive 23, which is a bargain compared to other Big Tech stocks.
Data by YCharts
Alphabet is by far the most affordable AI stock compared to its peers, making it a screaming buy for anyone looking to invest in cloud computing or AI.
