Source: PaxForex Premium Analytics Portal, Fundamental Insight
Investors warmly welcomed Alphabet's latest financial report, which showcased impressive results. The company reported a substantial revenue of $74.6 billion and diluted earnings per share of $1.44, surpassing the expectations set by Wall Street. Unsurprisingly, the stock experienced a surge following this announcement.
This positive momentum is part of a broader trend for the company. Throughout the first seven months of 2023, Alphabet's shares have outperformed the Nasdaq Composite Index by a remarkable 50%.
Given these outstanding achievements and the company's trillion-dollar valuation, investors may be wondering if it is an opportune time to consider investing in this tech giant.
In early 2022, when the Federal Reserve initiated aggressive interest rate hikes to combat surging inflation, economists predicted an imminent recession. This economic scenario led corporate executives to adopt cautious approaches, resulting in cutbacks on marketing spending. The fear was that reduced consumer demand might compel people to prioritize essential items over discretionary expenses, making increased advertising seem unnecessary.
Alphabet, too, experienced a decline in advertising revenue during Q4 2022, which continued with a slight drop in the first quarter. However, the most recent three-month period showed a promising 3% year-over-year gain in digital ad revenue. This suggests that Alphabet's core business driver, advertising, is picking up speed and heading towards more normalized growth levels.
As financial experts revise their projections, lowering the likelihood of a recession this year, the trend of increasing ad spending may continue in the coming quarters. Given that ad revenue contributes to a significant 78% of Alphabet's overall company-wide sales in Q2, this development could augur well for the company's financial performance.
While Alphabet's advertising revenue growth remains modest in the single digits, the Google Cloud Platform (GCP) is flourishing. GCP, the segment responsible for cloud services like computing, data storage, and AI tools, achieved remarkable sales of $8 billion in the last quarter, representing a robust 28% increase compared to Q2 2022. This growth rate remained consistent with the previous quarter.
A significant development worth noting for shareholders is GCP's improving financial performance. For the first time, the segment generated positive operating income in the first quarter of this year. Furthermore, the operating margin expanded to 5% in the most recent three-month period. If GCP can continue on this trajectory and eventually reach the impressive 28% operating margin that Amazon Web Services achieved in 2022, it can be expected that Alphabet's overall profitability will substantially expand over the years.
With forecasts predicting the global cloud market to become a massive $2.4 trillion opportunity by 2030, GCP finds itself in an enviable position to maintain its leadership in the industry for the foreseeable future. Presently, GCP holds the third position in the market, according to Statista. Additionally, with abundant financial resources and access to top-tier tech talent, Alphabet and GCP can continue investing in further enhancing their services for both current and future customers.
Despite experiencing a monumental rise in 2023, Alphabet's stock remains attractively priced. Currently, shares trade at a trailing price-to-earnings (P/E) ratio of 28, which is below the 10-year average P/E multiple of 30.6. Furthermore, with net income expected to grow, the forward P/E ratio looks even more favorable at 23.9. These valuation metrics provide compelling reasons to consider investing in this dominant enterprise.
Adding to its appeal, as of June 30, Alphabet boasts a strong financial position, with $118 billion in cash, cash equivalents, and marketable securities on its balance sheet. Moreover, its long-term debt balance is a modest $14 billion. The company consistently generates substantial free cash flow, further solidifying its status as a safe stock to buy and hold for investors.
Given its attractive valuation, robust financial position, and steady cash flow generation, Alphabet presents an enticing investment opportunity for those seeking a stable and promising addition to their portfolio.
As long as the price is above 123.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 127.98
- Take Profit 1: 133.50
- Take Profit 2: 140.00
Alternative scenario:
If the level of 123.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 123.00
- Take Profit 1: 119.00
- Take Profit 2: 115.00
