Earnings season is about to get into full swing. Alphabet (GOOG +0.45%) will lead the charge when it reports on April 24 after markets close. The technology conglomerate that owns Google, YouTube, and Android is one of the largest companies in the world by market capitalization, valued at $1.95 trillion as of this writing.
Its most important subsidiary, Google Search, looked bulletproof for years, with a true monopoly in search engines. That has changed with the rise of OpenAI and its ChatGPT services. Alphabet stock is off 22% from all-time highs, even as it set revenue records in 2024. Does that mean you should buy Alphabet stock before earnings next week? Or is OpenAI eating the company's lunch?
Tariffs and a major competitive threat
OpenAI has turned into a fast-growing competitor to Google Search. ChatGPT reportedly has 800 million users, which is still well off the billions that use Google Search but ChatGPT has grown like a weed over the last couple of years. Innovating at an insane pace and raising tens of billions of dollars from venture capital, the artificial intelligence (AI) start-up is moving quickly to try and win in the emerging field of large language models.
This has spooked investors but hasn't shown up in Alphabet's financial performance yet. Google Search revenue hit $54 billion last quarter, up 12% year over year.
My belief is that OpenAI will carve out some market share in the search engine and AI market, but the potential for growth in this segment will be so massive that there will be multiple winners. Analysts expect the industry to be worth well over $1 trillion by 2030. Even if OpenAI turns into a $100 billion business, there will be room for Alphabet (and others) to keep growing. A rising tide can lift all boats.
What about tariffs? Google's advertising business -- along with YouTube and Android -- relies on growing consumer spending in the United States. If this gets upended because of tariffs on China and other markets, Alphabet's earnings power may get hit in 2025.
However, over the long term, this business has been a phenomenal grower. It has multiple products with billions of users, meaning that most of the global population outside of China has interacted with at least one of its products. As long as global GDP grows, I expect Alphabet's consumer advertising business to grow over the long term.
NASDAQ: GOOG
Key Data Points
Fast growth in cloud computing
AI looks like a threat to Google Search, but it is a huge opportunity for Google Cloud. As many readers are aware, language models currently take a ton of computing power to train and run, which requires a ton of spending on cloud computing services. Google Cloud is there to serve these customers.
Last quarter, Google Cloud revenue grew 30% year over year to $12 billion, putting it at close to $50 billion in annualized revenue. Profit margins are expanding rapidly, hitting around 20% last quarter, and should march higher in the years to come. With the huge opportunity to still grow the AI market, Google Cloud can grow for a long time at Alphabet. If it reaches $100 billion in revenue and a 25% profit margin, that equates to $25 billion in operating income for the division.
Alphabet's total operating earnings were $112 billion last year, so a $25 billion contribution could be a significant growth driver for the company. It can also help any slowdown associated with the threat posed by OpenAI and other AI start-ups.
GOOG PE Ratio data by YCharts
Don't count Alphabet out just yet
There are a lot of doubters of Alphabet stock right now. It has a price-to-earnings ratio (P/E) of 20, which is the lowest among the technology giants, even though it is growing revenue at a double-digit rate. Investors are scared about the competitive threat posed by OpenAI and others when it comes to forecasting Alphabet's future financials.
I wouldn't doubt Alphabet just yet. It has fought back admirably with its Gemini models and has embedded a ton of new AI products into Google Search, Google Worksuite, and YouTube. The company has an incredible set of engineering talent, perhaps the largest group of AI talent in the entire world. It is not a certainty that Google will lose to OpenAI, although that is becoming priced into the stock.
On top of this falling stock price, Alphabet has begun to return capital to shareholders through buybacks and dividends. Shares outstanding are consistently falling, and its dividend currently yields 0.50%. Add strong capital returns into the mix, and Alphabet's earnings per share (EPS) can grow even faster than its revenue in the next decade.
At one of its cheapest P/E ratios in history, Alphabet stock looks like a great buy before its April 24 earnings report.
