With shares up by a healthy 59% over the last 12 months, Alphabet (GOOG 1.06%) (GOOGL 1.08%) stock is posting a healthy recovery after the slump it experienced in 2022. Like many technology companies, it is unwinding pandemic-era overexpansion while pivoting to new opportunities in generative artificial intelligence (AI). Let's discuss how the stock might perform over the next five years.
Alphabet is bouncing back from its slump
Initially, the COVID-19 pandemic led to a boom for Alphabet as consumers spent more time online during the lockdowns and other restrictions. But the good times led to overexpansion as the company raced to enlarge its workforce. When demand softened, it was left with weaker margins and the need to make big changes.
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In 2023, the worker-friendly tech giant axed a whopping 12,000 workers (6%) of its workforce. It also rolled back its famous office perks by cutting employee food, transportation, and fitness offerings (but before you feel too badly for them, remember that the average Googler still makes an average of $124,499 per year, according to Payscale). The belt-tightening has helped improve Alphabet's operating performance and put it in a great position to shift attention to new strategic opportunities.
First-quarter revenue increased 15% year over year to $80.5 million, representing strong growth in segments like Google Search and YouTube, which represent its core advertising business. Alphabet is also experiencing healthy expansion in cloud services as clients turn to its cloud computing platform for training and running their AI algorithms. Total operating profit surged by 28% to $25.9 billion, which suggests the company's cost-cutting efforts are showing results.
Alphabet over the next five years
While Google Search and YouTube drove Alphabet's top-line growth in the first quarter, investors shouldn't necessarily expect this trend to continue. Google's search business is mature, with a market share of 82%. YouTube is also at or near its saturation point. Over the coming years, management will likely transition these segments from growth engines into cash cows -- reducing costs to maximize profits.
AI will also play a significant role in Alphabet's future, especially because of its potential to synergize with legacy operations. The company's vast library of user-created content and search data from Google and YouTube could give it an edge in training generative AI algorithms. The new technology will continue to boost the cloud-computing segment as more enterprise clients turn to its platform to run their workloads.
According to management, 70% of generative AI unicorns (start-ups valued at over $1 billion) chose Google Cloud, including well-known names like Anthropic, which creates algorithms, and Midjourney AI, which specializes in AI images. As these companies grow, they will likely spend more money on cloud services, turning this into a reliable growth driver for Alphabet.
Who should buy Alphabet stock?
While Alphabet has historically been a growth stock, it is now making the slow transition into a value investment. With a forward price-to-earnings (P/E) multiple of just 22, shares are dirt cheap compared to other tech giants like Amazon or Nvidia, which trade for 41 and 37 times earnings, respectively. Alphabet can continue outperforming the market by keeping its operating costs low while raking in massive profits.
