Shares of Alphabet (GOOGL -3.37%) (GOOG -3.33%) have been on a roller-coaster ride in the past three months, first jumping and then slumping -- and now up about 11% so far in 2024. Investors have bid up shares in recent weeks on renewed enthusiasm over its outlook.
In fact, this "Magnificent Seven" stock is currently in record territory. That might discourage some investors from wanting to add the business to their portfolio. But it's important to view things with a fresh perspective, considering how Alphabet might fare over the next several years.
With that said, is it time to buy this stock now?
Dominating the internet
With a history that spans more than two decades, a current market cap approaching $2 trillion, and 2023 revenue of $307 billion, it's easy to see that Alphabet is a dominant internet enterprise. Its monster success over the years stems from owning some of the most popular services on the planet.
Just look at Google Search, which commands 91% of the global market. This is the company's crown jewel segment that generated 57% of all sales last year. Then there's YouTube, which is estimated to have a whopping 2.5 billion users. This top video entertainment service attracts more TV viewing time than Netflix, according to data from Nielsen.
We also can't forget about Google Cloud. The cloud computing market's third-largest player posted 26% revenue growth in the fourth quarter. And it has produced positive operating income in four straight quarters.
Investors have worried about Alphabet falling behind in the artificial intelligence (AI) race, thanks to early stumbles with some product introductions. Based on the stock's 10% rise in the month of March, it looks like investors have put these mistakes in the rearview mirror.
I view this as the right mindset. As a leading tech and internet company for a long time, with unlimited financial resources, massive amounts of data, and products and services used by billions of people, there might be no company better positioned in the AI wars than Alphabet.
Growth and valuation
Even with Alphabet shares near all-time highs, investors will surely find the current valuation reasonable. The stock trades at a forward price-to-earnings ratio of 22.8. That represents a slight premium to the S&P 500. But it's a discount to every other Magnificent Seven peer.
For that compelling valuation, investors are getting a business that is poised to continue posting solid growth. According to Wall Street consensus analyst estimates, Alphabet is set to increase revenue and earnings per share by 10.6% and 15.9%, respectively, on average over the next three years. Should the valuation multiple stay put, which is a probable scenario, shareholders will do quite well.
While it's usually a smart move to take analyst forecasts with a huge grain of salt, I think they are believable in this situation. Alphabet has many powerful secular tailwinds working in its favor.
The company benefits from more internet users across the globe, as well as greater usage per person. The world is only becoming more digitized, a trend that should help Alphabet find ways of generating higher amounts of ad revenue.
Streaming entertainment is another area where Alphabet will reap rewards. It's anyone's guess how the so-called streaming wars will turn out, but a valid argument can be made that YouTube will remain a top choice among viewers.
Grand View Research estimates that the cloud computing market will be worth nearly $1.6 trillion by 2030. With Google Cloud, Alphabet has a formidable opponent in the industry. This segment has already brought on well-known customers like Wendy's, Bloomberg, and PayPal.
Investors shouldn't overthink this one. Adding Alphabet to your portfolio today looks like a sound financial move.
