Have you heard of the “Magnificent Seven”? It’s a term used to refer to the stocks of Alphabet, Apple, and other top tech giants like Microsoft, Nvidia, Amazon, Meta, and Tesla. These companies have had an incredible year, with each stock gaining at least 49% in 2023. Impressive, right?
But let’s focus on Alphabet stocks this time. Is it a good buy right now? Well, Alphabet is one that had been down year to date but is suddenly up by a lot over the last month.
There’s a bullish sentiment around Alphabet due to several reasons – its attractive valuation, the ongoing AI megatrend, and its expanding profit margins. If you’re looking to invest in a tech giant with a promising future, Alphabet stocks might be worth considering.
Knowing a little more about Alphabet
Alphabet is the company that owns Google, the world’s largest search engine platform. With a market value of $1.93 trillion, Alphabet mainly generates its revenue from online ads displayed on its search engine and YouTube, which Google acquired over ten years ago.
In addition, Alphabet also sells applications, digital content, and in-app purchases through the Google Play store. Recently, Alphabet has diversified its revenue streams by entering high-growth areas such as public cloud and artificial intelligence.
The company has an advantage in its low valuation compared to its peers, with a price-to-earnings ratio of 26.7, which is slightly higher than Apple’s 26.3, making it the second-lowest ratio out of the Magnificent Seven stocks. Additionally, Alphabet’s price-to-free-cash-flow (FCF) ratio is 28.8, which is also the second-lowest ratio after Apple in the Magnificent Seven.
Alphabet’s shares were publicly traded in August 2004 and have since produced a remarkable return of 5,637%. This means that if you had invested $1,000 in Alphabet stocks soon after its IPO, your investment would be worth nearly $60,000 today. During the same period, the S&P 500 Index (SPX) returned only 600%.
How was Q4 of 2023 for Alphabet?
Alphabet was able to increase its sales by 9% year-over-year to $307 billion in 2023 despite an uncertain macro environment. The tech giant’s top-line growth accelerated to 13% in the December quarter, surpassing $86 billion.
By focusing on cost optimization, Alphabet was able to keep its cost of sales at only 5% higher than the previous year, amounting to $23.6 billion. Meanwhile, operating expenses stood at $25 billion, an increase of 11%, resulting in an operating income of $23.7 billion, up 30% compared to the year before. This indicates a healthy margin of 27%.
A high operating margin means that the company has free cash flow that can be used for reinvesting in organic growth, enhancing shareholder wealth, and pursuing accretive acquisitions. In Q4, Alphabet reported free cash flow of $7.9 billion, while the number was much higher at $69 billion in 2023.
Like other major technology companies, Alphabet allocated $62 billion to share buybacks for its Class A and Class C shares in 2023, and ended the year with a total of $111 billion in cash.
Billionaire subscription sales
Recurring sales generally help companies generate stable cash flows across market cycles. Alphabet’s growth in subscription sales throughout the years demonstrates its ability to offer high-value services to a wide variety of users.
Alphabet closed out 2023 with more than $15 billion in yearly subscription revenue, with YouTube being the main driver. YouTube Music and YouTube Premium are now available in over 100 countries, with a highly engaged user base.
Google One is another subscription service provided by Alphabet, which allows you to pay for storing your photos, videos, files, and other data. Google One has shown strong user growth and has amassed nearly 100 million subscribers to date.
Alphabet’s endeavors on Artificial intelligence
Alphabet, a prominent player in the field of artificial intelligence, has been using AI to enhance its portfolio of products, including Search and ads. Over the past year, Alphabet has launched AI-powered products like Bard and Gemini, which are expected to lead to the next wave of advancements.
Although Gemini has faced some challenges, the platform has been designed to comprehend and merge various types of content, including text, images, audio, video, and code, while operating on devices ranging from smartphones to data centers.
Alphabet has emphasized that it is experimenting with Gemini in Search to make SGE (Search Generative Experience) faster for users. By incorporating AI into Search, Alphabet caters to a wide range of information needs.
Bard, Alphabet’s conversational AI tool, is powered by Gemini Pro and is available in 40 languages and 230 countries. It is expected to remain a key platform for Alphabet in the future.
Sales of Google Cloud also increasing
Alphabet experienced a 26% year-over-year increase in sales to $9.2 billion in Q4 by turning to Google Cloud. The segment is now consistently profitable, earning an operating income of $864 million in Q4, which indicates a margin of 9%. In FY 2023, Google Cloud sales rose by 26% to $33 billion, accounting for over 10% of total revenue.
Google Cloud is planning to integrate Gemini to expand its range of enterprise customers, which is expected to increase engagement rates. Alphabet noted that there is strong demand for its vertically integrated AI portfolio, which should create new opportunities for Google Cloud across its product portfolio.
Should you buy Alphabet stocks?
Alphabet is performing exceptionally well, with significant growth in revenue and earnings, along with an improvement in profit margins. Alphabet’s investments in AI are expected to help it gain traction in the highly disruptive market over time.
Alphabet stock ratings reveal that analysts consider it a Strong Buy. At the moment, the average Alphabet stock price target stands at $165.28, which implies an upside potential of 6.7% from current levels.
Analysts predict that the adjusted earnings of Alphabet stock will increase from $5.80 per share in 2023 to $6.81 per share in 2024 and $7.85 per share in 2025. Therefore, even though the stock trades at a higher multiple than its peers, priced at 22.8x forward earnings, it is not too expensive, as its bottom line is expected to grow by more than 15% annually in the next two years.
While Alphabet may not be the most exciting growth stock available at the moment, it has shown to maintain a profitable business and has room to take risks and unlock growth. Its extensive resources and history of innovation are sufficient reasons to consider Alphabet stock as a good buying option.
(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.)
