Alphabet (GOOG +1.10%) (GOOGL +1.31%) has featured in countless headlines over the last year as it has delivered a solid turnaround in its digital advertising business and gradually expanded its artificial intelligence (AI) capabilities.
The company's shares have climbed nearly 60% in the last twelve months, significantly outperforming the S&P 500. Meanwhile, Alphabet's most recent quarter (the first quarter of 2024) has shown signs that its heavy investment in AI is beginning to pay off.
Data by YCharts
Brands like YouTube, Android, Chrome, and Google have made Alphabet a tech behemoth, garnering billions of users worldwide. The company has used its vast user base to build a lucrative advertising business. And now, the popularity of these platforms is providing Alphabet with multiple opportunities to boost its venture into AI.
So, here's why it's not too late to buy Alphabet's stock.
Alphabet delivered glowing quarterly results, followed by cost-cutting measures
Alphabet posted its Q1 2024 results on April 25, leading its stock to pop 6%. The company delivered promising earnings, with revenue rising 15% year over year to $81 billion.
During the quarter, Alphabet enjoyed significant gains in its advertising division, with Google Services sales increasing by 14%. Macroeconomic headwinds hit the company's ad business hard in 2022 and at the start of 2023. However, recent earnings suggest these challenges have subsided.
About 80% of Alphabet's revenue comes from its ad services. Yet, its biggest growth catalyst over the next decade will likely be its AI-focused cloud business with Google Cloud. The segment reported revenue growth of 28% year over year while operating income skyrocketed 371% to $900 million.
NASDAQ: GOOGL
Key Data Points
Alphabet has gradually expanded its AI cloud services over the last year, launching its most powerful AI model, Gemini, in December 2023. The company's investment in generative technology is beginning to pay off as businesses increasingly use its services to integrate AI into their workflow.
In addition to a positive quarter, Alphabet announced plans to lay off at least 200 employees from its "Core" organization as part of its latest round of budget cuts. Like many tech companies moving past the economic downturn of 2022, Alphabet is prioritizing profitability and slashing anything it deems unnecessary, which only strengthens its outlook going forward.
One of the best-valued stocks in the AI market
Alphabet has been slightly overshadowed in AI since last year as rivals Amazon and Microsoft appeared to get a better start in the industry. A fumbled launch for its AI model Gemini and the third largest market share in cloud computing (behind Amazon and Microsoft) concerned investors. However, Alpahbet's latest quarterly earnings have tempered those fears.
Alphabet's cloud business appears to be taking off as it attracts more users, proven by its nearly 30% revenue growth and soaring profits. Meanwhile, expanded AI capabilities with its Gemini and other models will help the company bolster multiple areas of its business, such as offering more efficient advertising, creating a Search experience closer to OpenAI's ChatGPT, improving its productivity services, and even generative updates to Android. In fact, Alphabet announced AI-powered ads last year as it uses Gemini to enhance its ad solutions.
The company's reach in tech is vast, and with $69 billion in free cash flow, Alphabet has the brand power and financial resources to go far in AI. The tech giant announced last month it would invest $3 billion in building data centers in Indiana and Virginia as it works to strengthen Google Cloud. Additionally, Alphabet will spend $75 million to fuel its Google AI Opportunity Fund, which aims to teach Americans AI skills.
Data by YCharts
Moreover, this chart shows Alphabet is potentially one of the best-valued AI stocks. The company's forward price-to-earnings (P/E) ratio and price-to-free cash flow are among some of the lowest compared to Amazon, Microsoft, and Apple. Forward P/E and price-to-free cash flow are helpful when determining a stock's value, as they consider a company's financial prospects. For both valuation metrics, the lower the figure, the better the value.
As a result, this chart indicates Alphabet shares are a bargain compared to its peers. And with arguably similar, if not more, potential in AI than these companies, Alphabet shares are a no-brainer. Despite having the third largest market share in cloud computing after Microsoft and Amazon, its free cash flow is similar to Microsoft's $70 billion and significantly more than Amazon's $46 billion, suggesting Alphabet has the financial resources to keep up with its rivals in the coming years.
Additionally, the billions of users that Alphabet's platforms attract could be leveraged to expand in AI, becoming a major growth driver in the commercial and public adoption of AI services.
Alphabet's stock is up 536% in the last ten years. Yet, it appears nowhere near hitting its ceiling. Vast financial resources, an extensive user base, and positive quarterly results suggest it's not too late to invest in Alphabet and profit from its exciting future.
