Source: PaxForex Premium Analytics Portal, Fundamental Insight
Alphabet's heavy reliance on digital advertising can be advantageous during prosperous economic periods, but it poses challenges during weaker ones. The company experienced a notable slowdown in revenue growth in the most recent quarter (ended March 31), with an increase of only 3% compared to previous years. This exemplifies the impact of the current macroeconomic conditions. To mitigate the situation, Alphabet is actively pursuing cost-cutting measures, including the high-profile layoff of 12,000 employees.
Despite these challenges, the market has responded positively, evident in the 40% increase in Alphabet's shares in 2023. However, the stock is still 17% below its all-time high. Now, the question arises: Is Alphabet stock a good investment at the moment? Allow me to explain why I firmly believe the answer to that question is a resounding yes.
The rise of artificial intelligence (AI) and the growing user base of OpenAI's ChatGPT, reaching 100 million monthly active users, has sparked curiosity among investors regarding the transformative impact of this technology on the corporate landscape. One potential contender that has drawn attention is Microsoft's Bing search engine, which has integrated ChatGPT. Speculation has emerged suggesting that Bing could pose a threat to Google's dominance in the search industry. However, these concerns have been greatly exaggerated.
According to Statcounter, Google Search, which contributed 58% of Alphabet's total ad revenue in the first quarter of 2023, maintained its overwhelming global search market share. In April, Google Search commanded a dominant 92.8% share, a slight increase from 92.6% in December, shortly after ChatGPT was introduced. On the other hand, Bing experienced a decline in market share, dropping from 3% in December to 2.8% in April. These figures clearly indicate that Google's significant lead is unlikely to diminish anytime soon. Presently, the data does not support the notion of Google losing its edge in this regard.
Google Cloud Platform (GCP) serves as Alphabet's competitive response to Amazon Web Services (AWS) and Microsoft's Azure. In the most recent quarter, GCP demonstrated remarkable growth, with revenue increasing by 28% year over year. This outpaced the 16% growth rate achieved by AWS, suggesting that GCP may be gaining market share in the cloud computing industry.
Moreover, GCP achieved a significant milestone by generating its first operating profit during the first quarter. This accomplishment hints at potential increased profitability in the future.
GCP boasts an impressive client roster, including renowned companies like Etsy, UPS, and Cardinal Health. With an annualized revenue nearing $30 billion and a market projected to reach $1.6 trillion by 2030, it becomes evident that GCP has substantial room for growth. These factors contribute to a compelling narrative surrounding GCP's future prospects.
Alphabet has established itself as a frontrunner in the field of artificial intelligence (AI), leveraging this technology to enhance search capabilities, provide real-time traffic updates on Maps, and combat spam in Gmail, among other applications. In a recent announcement at the annual I/O developer conference, CEO Sundar Pichai revealed that Alphabet intends to integrate AI into its Workspace products and various other tools. This strategic integration of AI across multiple domains showcases Alphabet's ongoing commitment to innovation.
Although digital advertising understandably garners significant attention within Alphabet, considering its role as the primary revenue generator, the company's Other Bets segment is also making notable progress. Notably, Waymo, Alphabet's autonomous driving unit, has recently forged a partnership with Uber. This collaboration enables Uber customers to book rides utilizing Waymo's technology, initially in the Phoenix area. This milestone represents a significant stride towards making Waymo's autonomous driving technology accessible to a broader audience, potentially marking the first major step in achieving mass adoption.
Alphabet's continuous exploration of AI applications and the promising advancements within its Other Bets segment signify that the company remains at the forefront of innovation and is actively pursuing opportunities beyond its core digital advertising business.
Despite the significant surge in Alphabet shares during 2023, their current trailing price-to-earnings (P/E) ratio of 27.6 and forward P/E ratio of 23.2 do not appear excessively demanding for shareholders. This valuation seems reasonable considering that Alphabet remains a dominant company with several growth catalysts working in its favor.
Digital advertising, the cloud infrastructure market, and the streaming industry, particularly led by YouTube, are all substantial and expanding sectors where Alphabet holds a strong position.
In the last quarter, Alphabet generated $17.2 billion in free cash flow, marking a 12% year-over-year increase. Additionally, the company boasts a robust balance sheet, with $115 billion in cash, cash equivalents, and marketable securities. This financial strength provides Alphabet with virtually limitless resources to pursue new initiatives and drive significant progress.
Considering these factors, Alphabet's stock appears to be an attractive investment opportunity at present. Furthermore, it has the potential to serve as a core holding in a long-term portfolio strategy.
As long as the price is above 120.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 124.57
- Take Profit 1: 130.00
- Take Profit 2: 135.00
Alternative scenario:
If the level of 120.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 120.00
- Take Profit 1: 116.00
- Take Profit 2: 112.00
