A group of seven megacap technology companies, known as the "Magnificent Seven," played a central role in driving a nice surge in technology stocks in 2023, which is evident from the 66% jump in the Nasdaq-100 Technology Sector index during the year.
The Magnificent Seven group comprises Apple, Amazon, Alphabet (GOOG 9.96%) (GOOGL 10.22%), Meta Platforms, Microsoft, Nvidia, and Tesla. These tech titans delivered healthy gains to investors in 2023.
For instance, shares of Alphabet have jumped 61% during the year. In this article, we will take a closer look at the reasons why Alphabet's robust rally is set to continue not just in 2024 but also in the long run.
AI can help accelerate Alphabet's growth
Alphabet stock's jump in 2023 can be attributed to the company's improving financial performance, driven by gains in its advertising and cloud businesses. Alphabet's revenue increased 11% year over year to $76.7 billion in the third quarter of 2023. Its diluted earnings jumped an impressive 46% year over year to $1.55 per share.
The good part is that Alphabet's financial performance improved every quarter in 2023. Its revenue was up just 3% year over year in Q1, followed by a 9% jump in Q2. Analysts are expecting Alphabet to finish the year with $306 billion in revenue, which would be an 8% increase over 2022.
GOOG Revenue Estimates for Current Fiscal Year data by YCharts
More importantly, as the chart above indicates, Alphabet's growth rate is anticipated to get better in 2024 and 2025. This potential acceleration in Alphabet's growth can be attributed to the secular opportunities the company is sitting on, such as an uptick in digital ad spending and the growing adoption of artificial intelligence (AI) that could positively impact the company's search and cloud businesses.
For example, global digital ad spending is estimated to jump 11% in 2024 to $696 billion, which is in line with the growth this space clocked in 2023. Alphabet is looking to capitalize on this massive market opportunity by giving advertisers AI-powered tools so that they can improve audience targeting and generate stronger returns on the ad dollars they spend.
Alphabet's Performance Max platform allows advertisers to create AI-powered ad campaigns, and the company points out that those who have adopted this platform have witnessed an 18% increase in average conversion rates. Additionally, Alphabet management points out that almost 80% of its advertisers "use at least one AI-powered Search Ads product."
As such, Alphabet has positioned itself to make the most of the growing adoption of AI within the digital ad market, which is expected to generate $107 billion in annual revenue in 2028 as compared to just under $16 billion in 2021.
On the other hand, Alphabet's Google Cloud business is also getting a nice boost thanks to AI. The company's Google Cloud revenue increased 22% year over year in the third quarter to $8.4 billion. That's not surprising, as Google is offering multiple AI products in the cloud, which allow customers to build generative AI applications, gain insights from unstructured data with the help of AI, and train machine learning models, among other things.
More importantly, the company has landed multiple customers for its AI-fueled cloud services already. This trend is likely to continue as the size of the cloud AI market is expected to hit a whopping $887 billion in 2032 as compared to just $43 billion last year. So, Alphabet is on track to benefit from massive markets where AI adoption is gaining steam, which is why it won't be surprising to see the stock delivering more upside in 2024, as well as in the long run.
More reasons to buy the stock right now
We have already seen that Alphabet is predicted to deliver stronger revenue growth this year. What's more, analysts are forecasting its earnings to grow at a healthy pace as well, following this year's estimated jump of 26% to $5.77 per share.
GOOG EPS Estimates for Current Fiscal Year data by YCharts
Alphabet has a five-year average price-to-earnings (P/E) ratio of 27.4. Multiplying that with the company's projected 2024 earnings of $6.70 per share points toward a stock price of $183, which would be a jump of 28% from current levels. Another year of robust bottom-line growth in 2025 means that this AI stock is built for even more upside in the long run.
At the same time, investors should note that Alphabet is the cheapest of the Magnificent Seven group.
AAPL PE Ratio data by YCharts
So, investors are getting a good deal on this tech titan right now, even after the impressive gains it has delivered in 2023. What's more, Alphabet stock could deliver even stronger gains in the New Year if the market decides to reward it with higher earnings multiple thanks to its AI-fueled growth, giving investors another reason to buy it before it soars further.
