Despite the strength and stability of Google parent Alphabet (GOOGL 0.42%) (GOOG 0.58%), its direction over the next five years is far from certain.
The company has been in a gradual process of reducing the percentage of revenue it derives from advertising. It owns numerous other businesses that could potentially drive revenue growth for the tech giant, though nobody can guarantee if or how much such enterprises will succeed.
Thus, the question for investors is whether that uncertainty prevents the stock from becoming a buy over the next five years. Let's take a closer look.
Alphabet's future
Investors likely struggle with Alphabet's direction simply because it can go in so many directions. As a digital advertising pioneer, the company grew as it leveraged proficiency in search, ownership of YouTube, and artificial intelligence (AI) prowess to increase its revenue.
Unfortunately, amid OpenAI's advancements in the field, Alphabet seems to suffer from a perception that it has fallen behind in the generative AI race. Many investors questioned whether AI would supplant Google Search, and the release of Gemini and its pledge to invest $75 billion in capital expenditures during 2025 alone may not have appeased more skeptical investors.
Moreover, Alphabet has gradually moved to become less dependent on advertising for revenue. Digital ads accounted for 76% of Alphabet's revenue in 2024, down from 77% in 2023 and 79% in 2022.
That trend logically turns investors to revenue sources outside of advertising, and here, investors will likely find early signs of promise. Google Cloud now accounts for 11% of the company's revenue, thanks in part to its 31% yearly revenue growth. Additionally, the colmpany owns businesses such as Waymo that do not show up in its quarterly reports but could stand out in the future as its business earns more revenue.
In fact, it owns so many of these businesses that investors should wonder whether Alphabet will spin off some of these enterprises. Although such moves will not necessarily help Alphabet stock directly, shareholders could still benefit if they gain shares in additional companies.
Alphabet's overall financial performance
Investors should also not count out Alphabet's tremendous resources. It holds $96 billion in liquidity, and with its ability to generate revenue and profits, it can likely afford the capital expenditures needed to stay relevant in the AI race.
In 2024, revenue of $350 billion rose 14% from year-ago levels. Aside from Google Cloud's considerable growth, advertising revenue increases remain in the double digits.
Moreover, net income in 2024 topped $100 billion amid its rising operating income. This was a 35% increase from year-ago levels and translated into almost $73 billion in free cash flow, a figure that excluded the $53 billion it spent in capex in 2024.
The company does not offer guidance. However, analysts project revenue growth rates of 11% in both 2025 and 2026. Even though that would represent some slowing from 2024, investors should keep the overall state of Alphabet stock in mind.
Over the last year, the stock is down modestly, mostly attributable to the approximate 25% drop from its high in early February.
NASDAQ: GOOGL
Key Data Points
Nonetheless, the drop might appear overdone. The company trades at a P/E ratio of 20. This is the lowest among the "Magnificent Seven" stocks and also implies significant overselling, especially considering the 35% rise in net income.
Alphabet in five years
Despite its challenges, Alphabet has strongly positioned itself to beat the market over the next five years.
Although a lot can happen during that period, the company continues to generate massive profits, more than enough to fund efforts to stay competitive in its industry. Thus, it is premature to count the Google parent out of the AI race.
Additionally, the 20 P/E ratio is extremely low for a company that continues to grow its profits rapidly. Between the continued growth potential and the likelihood that Alphabet's earnings multiple will rise over time, the future for this AI stock continues to look bright.
