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Is Alphabet stock an overlooked buy?

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Have you heard of the “Magnificent Seven”? This term refers to the seven tech giants that are ruling the market right now – Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta Platforms, and Tesla. These powerhouses have been delivering exceptional returns and have caught the attention of investors worldwide. Interestingly, all of these companies have more than doubled in value over the past five years, outshining the market during this time. However, there is one gem in this group that is often overlooked – Alphabet. As the only one in the group with a P/E ratio lower than that of the S&P 500, it has been an underappreciated stock. 

Despite its $1.75 trillion market cap and a 56% rise in value over the past year, Alphabet’s gains fall behind most of the other Magnificent Seven stocks. Nevertheless, Alphabet’s good valuation and new opportunities make it an attractive investment option for long-term returns.

Alphabet’s good valuation

Alphabet, the advertising giant, has reported impressive Q4 2023 earnings showing a 13% revenue growth. The company is predicting that advertising revenues will continue to rise throughout 2024. Google Cloud’s revenues have also surged from $7.3 billion to $9.2 billion year-over-year, and it remains highly profitable. It is viewed as a key factor in most investors’ bullish thesis for this stock.

Even though Alphabet’s stock has underperformed its peers, it still has a better valuation than most tech companies, with a P/E ratio of 24.5 and solid profit margins. Additionally, the company’s net profit margin usually exceeds 20% and is expected to keep increasing in the future.

Alphabet has a trifecta of favorable factors: rising revenue, more profits, and cost-cutting measures. In fact, the company reported a 13% YoY revenue growth and 51.8% YoY net income growth in Q4 2023. Alphabet’s efforts to reduce its workforce contributed to higher margins, and these efforts are still ongoing.

Google Cloud’s profitability is a significant contributing factor to Alphabet’s rising net income. The cloud computing segment attributed to more than 10% of Q4-2023 revenue, generating $9.2 billion of the company’s $86.3 billion in revenue. Google Cloud swung from a $186 million operating loss in Q4 2022 to generating $864 million in operating income in Q4 2023.

It is expected that Google Cloud’s margins will significantly improve in future quarters, thus reducing Alphabet’s P/E ratio by increasing its earnings.

Advertising seems promising

Alphabet relies heavily on advertising for its revenue, despite its expansion into other areas. Although advertising sales decreased in 2022, they rebounded in 2023, which was evident in the company’s fourth-quarter results. 

With $76.3 billion in revenue from Google Services in Q4, which mainly includes advertising, Alphabet experienced a 12.5% YoY growth. The upcoming Presidential Election and the Olympic Games are expected to give advertising revenue a further boost. 

As with most businesses, higher advertising revenue leads to more profits, and Alphabet achieved a 35.0% operating margin with its Google Services segment in Q4. 

The long-term opportunity of AI

Nvidia and Microsoft are leading the artificial intelligence industry among the Magnificent Seven stocks. However, Alphabet also has the potential to gain a significant share of the market by utilizing its current technology and investing in new ventures. 

Alphabet launched Gemini to expand its presence in the AI realm, and it also made an investment of over $2 billion in a competitor of OpenAI. Although Alphabet has been leveraging artificial intelligence to enhance its search results and cloud platform, these investments represent the next steps in its efforts to gain market share. 

Alphabet has the potential to catch up with Microsoft in the AI race. Google Cloud was launched two years after Amazon Web Services, yet it has become a crucial part of Alphabet’s business. Alphabet is also investing in numerous ventures, known as Other Bets, which are growing at a rapid pace. While this segment only accounts for a small portion of the company’s total revenue, it is important to keep an eye on the various businesses under this umbrella term.

Should you buy Alphabet stock?

Alphabet’s stock seems to be a hot favorite among most analysts. Latest reports show it has been rated Strong Buy by analysts, with 29 Buys and eight Holds. Analysts have set an average price target of $164.59 for GOOGL stock, suggesting a potential upside of 14.3%. That’s definitely something worth keeping an eye on!

What are your thoughts on Alphabet stock? Do you think it would be worth buying?

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(Information in this post is for general informational purposes only. It cannot and should not be considered as suggestions or recommendations regarding investing or financial decisions.)

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