The so-called "Magnificent Seven" businesses are taking the investing world by storm. They dominate their industries, possess disruptive potential, and have seen their shares rise meaningfully in recent years.
Alphabet (GOOGL 0.33%) (GOOG 0.72%), one of the earliest internet firms, falls into this category. The "Magnificent Seven" stock skyrocketed almost 500% in the past decade. And it carries a massive market cap of just under $2 trillion.
Does this monster historical performance mean that it's time to sell Alphabet? Let's take a closer look at the business and stock.
Alphabet benefits from multiple secular trends
With 2023 revenue of $307 billion, investors might assume that Alphabet simply doesn't possess enough growth potential to drive further share gains in the next decade. However, it's easy to be optimistic once you dive deep into the company's operations.
The majority of sales come from digital advertising, an industry that Alphabet is the clear leader in. According to Grand View Research, this market is forecast to be worth more than $1 trillion by 2030, compared to $365 billion in 2022.
The business has two key avenues to boost its digital ad sales. Google Search, which commands more than 91% share of the search market, gains when there are more people using the internet. YouTube, estimated to have 2.5 billion users, is another service that rakes in ad revenue.
The popular video streaming service also gives Alphabet a player in the streaming wars. More hours are spent watching YouTube in the U.S. daily than Netflix. This demonstrates the advantage of a user-generated model that can introduce content that can cater to all viewers' interests.
We can't forget about the under-the-radar Google Cloud segment. Revenue here consistently climbs at a greater than 20% year-over-year clip. And it posted positive operating income for all of 2023.
Alphabet has been a huge winner for investors in the past. And thanks to the ongoing popularity of its products and services, it's reasonable to expect revenue and earnings to keep growing over time.
Thinking about artificial intelligence
The rise of artificial intelligence can be viewed as both a threat and an opportunity. On one hand, critics believe the ability for users to get clear answers to their queries spells the end of Google Search as we know it. If people spend less time scrolling through search results, there is a declining need for ads.
Speaking of Alphabet's crown jewel, there are reports of the business launching a paid subscription for an AI-powered Google Search. This could be viewed as a sign that the company's dominance is eroding.
NASDAQ: GOOGL
Key Data Points
However, this could be viewed as a smart strategic decision by the leadership team to get ahead of the curve and provide consumers with more choice. Given the massive computing expenses of operating AI and infrastructure, Alphabet is simply trying to pass these costs to users. If they find AI capabilities valuable to their search needs, then they can pay for it, creating another recurring revenue stream for the business.
Gauging investor expectations
Having numerous secular trends working in its favor, coupled with a forward-thinking approach to AI, are powerful reasons to want to keep owning this stock. But prospective investors need to consider the current valuation as well. If the price is too high, forward returns from this point are likely to disappoint.
For those considering selling their Alphabet position, it's important to realize that the stock trades at a forward P/E ratio of just 23.3. Therefore, I'm confident saying I believe the stock is still a buy and hold at this point. New and existing shareholders are poised to benefit.
