In the stock market, there are no guarantees. It's impossible to know what others are thinking and what future events may pop up that could derail an entire investment thesis. However, there are some things investors can be fairly certain about, and I'm fairly confident in these predictions with Alphabet (GOOG 0.56%) (GOOGL 0.42%).
Should these predictions come true, and I think there's a high likelihood they will, the stock will rocket higher in response. Let's look at these reasons and then figure out where Alphabet stock may go as a result.
1. The advertising market is recovering
Although you may hear about the various things Alphabet is doing with AI, it's still an advertising business at heart. In Q3, nearly 80% of revenue came from advertising. In late 2022 and early 2023, this wasn't a great business, as many clients pulled back their spending to protect resources in case of a recession. Now that the chances of a recession have somewhat faded, many companies are choosing to advertise again.
NASDAQ: GOOGL
Key Data Points
This development helped Alphabet in Q3, as its ad revenue grew 9.5%. Combined with other areas of stronger growth, this growth helped Alphabet to boost its revenue 11%, the fastest pace since Q2 2022. With other advertising companies like Meta Platforms, Facebook's parent company, also seeing strength in their ad businesses, Alphabet should see a strong 2024.
2. YouTube is a sleeping giant
Within Alphabet's ad division is YouTube. This is truly a segment to watch, as the amount of screen time it commands is far greater than any other streaming service. Nielsen found YouTube accounted for 9% of screen time in September 2023, beating Netflix's 7.8% share, Disney+'s 1.9%, and Peacock's 1.1%.
In Q3, YouTube's ad revenue rose 12.5%. Once advertisers recognize how important of a platform this is to advertise on, Alphabet will see a significant revenue bump.
With the broader ad market slated to recover in 2024, I'm confident YouTube will have a strong year.
3. Alphabet's Gemini model smokes the competition
Since CEO Sundar Pichai declared Alphabet an "AI-first" company in 2016, Alphabet has been seen as an AI-focused investment. However, when OpenAI launched ChatGPT, it seemed Alphabet was beat.
Although Alphabet may not have landed the first punch, it dealt a serious blow when it launched its latest Gemini generative AI model. The newest iteration is the first AI model to outperform human experts in the massive multitask language understanding test and outperform its competitors in other key benchmark tests.
Throughout 2024, we'll see more implementation of generative AI models into various platforms. With Alphabet's Gemini model achieving best-in-class performance, it will probably see wide-scale adoption. If so, Alphabet will have another revenue stream, giving it the fuel to drive the stock price higher.
4. Google Cloud will see strong expansion
Cloud computing is a massive benefactor to the AI arms race, as companies need to expand their computing power and data storage to create proprietary AI models for their business. Although Google Cloud is third in market share, behind Microsoft's Azure and Amazon Web Services, the cloud computing market opportunity is expected to expand to $1.27 trillion by 2028, leaving plenty of room for multiple winners.
In Q3, Google Cloud grew at a 22% pace, although its operating income fell from Q2, and it posted only a 3% operating margin, as Google Cloud is still growing and capturing as much of the market as possible and isn't concerned with profit. Throughout 2024, this segment has a chance to add to Alphabet's operating income in a big way through increased efficiency and growth, making it a top reason to invest in Alphabet.
5. Alphabet's recovering margin will drive massive profit growth
In 2022, Alphabet's profit margin plummeted from bloated payroll and decreased business. However, now that Alphabet has right-sized its staff and is seeing its business pick up, it should show strong profit growth throughout 2024.
Wall Street analysts expect Alphabet's revenue to grow 11% in 2024 to $306.5 billion. If Alphabet can maintain its strong 26% profit margin, the best since Q1 2022, then it could deliver profit of $79.7 billion in 2024.
GOOGL Profit Margin (Quarterly) data by YCharts
That prices Alphabet at 22 times 2024 earnings, far cheaper than many of its tech peers, including Apple at 27 and Microsoft at 29.
As a result, Alphabet looks like a strong buy right now. It has multiple promising segments plus market-beating growth. Combine that with a reasonable stock price, and you have a recipe for a stock that can rocket higher in 2024.
