Alphabet (GOOG 1.06%) (GOOGL 1.08%) became the latest tech company to announce a dividend. For shareholders on record June 10, Alphabet will pay a $0.20-per-share dividend, which is around a 0.5% yield when that dividend is annualized.
While some investors are thrilled about this announcement, it's a moot point for me. Instead, I'm looking at how strong Alphabet's business looked in Q1 and realizing that Alphabet is still a growth stock to be reckoned with.
Alphabet's business had a phenomenal quarter, regardless of what division you're analyzing
At face value, Alphabet's Q1 was awesome. Revenue rose 15% year over year to $80.5 billion, and earnings per share (EPS) rose 62% to $1.89. But when you break it down, there were some even more impressive results hidden within those figures.
Although many investors are focusing on Alphabet's artificial intelligence (AI) products, it's still an advertising business at its core. Nearly 77% of its revenue came from advertising-related sources in Q1, and this revenue comes from sector-leading businesses like the Google search engine and YouTube.
Compared to Google, YouTube is in its infancy. But its popularity allows it to draw in top advertising dollars. In the U.S., YouTube is actually the most popular video platform besides linear TV. As a result, it draws a lot of eyeballs and thus establishes its status as a top place to advertise. This is likely why YouTube had a phenomenal quarter, with revenue up 21%.
Another area that's thriving is Google subscriptions, platforms, and devices. This includes divisions like its YouTube TV service, NFL Sunday Ticket, revenue from Google Play, and Pixel phones. Revenue rose 18%, showing consumers still want to spend on nonessential items.
Lastly, Google Cloud crushed it in Q1. This division focuses on Alphabet's cloud computing business, which is vital for customers who need to increase their computing capacity but don't want to invest in the systems themselves. Cloud computing has become incredibly popular with the rise of AI workloads, as businesses can't justify the cost of thousands of GPUs to run their models for a short time. So they rent some computing power from cloud computing providers like Google Cloud.
Google Cloud is a popular choice for AI workloads, as it has already captured 90% of generative AI unicorns (private companies worth at least $1 billion). This popularity has spread into other industries, which is why Google Cloud's revenue rose 29% in Q1. It's also becoming far more profitable, as it posted an operating margin of 9% instead of 3% last year.
Alphabet's business is truly firing on all cylinders, so the stock jumped nearly 10% the day following earnings. But I still think investors can get in on this incredible business, as it's just getting started.
The stock still doesn't command a high premium
After the jump, Alphabet now trades for 21.8 times forward earnings.
GOOGL PE Ratio (Forward) data by YCharts
Compared to the much broader S&P 500, which trades at 20.8 times forward earnings, it doesn't command much of a premium to the broader market. This gives me confidence that investors can buy the stock now and not worry about overpaying for Alphabet.
Furthermore, the stock would trade well below its five-year average valuation if Alphabet hits analyst guidance. If it hits its earnings targets plus returns to its average trailing price-to-earnings ratio of 26, that means the stock would have a 22% upside over the next 12 months. That's a solid investment and one I'll gladly partake in.
Beyond one year, I see plenty of trends in Alphabet's favor, as it has emerged as an AI leader after stumbling out of the blocks. Because of that, I think right now is an excellent buying opportunity for Alphabet's stock.
