In its latest quarter, Google parent Alphabet Inc. (GOOGL) rebounded from a notable advertising slump, signaling a return to a growth cycle for Artificial Intelligence (AI) technology investments. The fiscal second-quarter results reversed a financial downturn amid fears of AI advancements challenging its dominant search engine.
After experiencing consecutive year-over-year declines in ad revenue for the first time in history, GOOGL’s ad sales rebounded impressively during the second quarter. Surpassing expectations, ad sales reached $58.1 billion, reflecting a 3% increase from the previous year.
Moreover, the company’s AI leadership and engineering excellence are greatly aiding the company in enhancing its services. Product Studio, unveiled on May 23, is empowering merchants with a potent generative AI tool for unique e-commerce visuals, elevating product presentations on GOOGL's platform.
Additionally, on May 18, GOOGL unveiled the private preview of Duet AI for Google Cloud. This always-on AI collaborator, powered by generative AI, offers real-time code suggestions, chat assistance, and customizable features designed to boost developer productivity, efficiency, and innovation within GOOGL’s cloud services.
Shares of GOOGL have surged 37.1% year-to-date to close its last trading session at $122.21.
Here is what could shape GOOGL’s performance in the near term:
Robust Financials
For the second quarter that ended June 30, 2023, GOOGL’s revenue increased 7.1% year-over-year to $74.60 billion. Its net income and EPS grew 14.8% and 19% from the prior year’s period to $18.37 billion and $1.44, respectively. Furthermore, its cash inflow from operating activities rose 47.6% from the year-ago value to $28.67 billion.
Solid Historical Growth
Over the past three years, GOOGL’s revenue grew at a 19.5% CAGR. The company’s EBITDA and net income rose at CAGRs of 21.9% and 19.3%, respectively. Furthermore, the company’s EPS and total assets increased at CAGRs of 22% and 10.6%, respectively, during the same period.
Favorable Analyst Estimates
Analysts expect GOOGL’s revenue to increase 6.2% year-over-year to $300.40 billion for the fiscal year ending December 2023. The company’s EPS for the current year is expected to rise 16.9% from the previous year to $5.33.
Furthermore, GOOGL’s revenue and EPS for the next fiscal year (ending December 2024) are expected to grow 11.2% and 18.2% year-over-year to $333.99 billion and $6.30, respectively.
High Profitability
GOOGL’s trailing-12-month gross profit margin of 55.30% is 11.5% higher than the 49.59% industry average. Its trailing-12-month EBITDA margin of 30.74% is 70.1% higher than the industry average of 18.08%. In addition, the stock’s trailing-12-month net income margin of 20.58% compares to the industry average of 2.94%.
In addition, GOOGL’s trailing-12-month levered FCF margin of 19.63% is 166.5% higher than the industry average of 7.36%. Also, its trailing-12-month ROCE, ROTC, and ROTA of 22.76%, 15.74%, and 15.86% compare to the respective industry averages of 3.29%, 3.86%, and 1.49%.
POWR Ratings Show Promise
GOOGL’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. GOOGL has a B grade for Quality in sync with its higher-than-industry profitability. The stock also has a B for Sentiment, consistent with the favorable analyst estimates.
GOOGL is ranked #7 in the 58-stock Internet industry. Click here to access GOOGL’s Growth, Value, Momentum, and Stability ratings.
Bottom Line
In its fiscal second quarter, GOOGL made a remarkable ad-sales recovery, dispelling concerns about AI advancements challenging its search engine dominance. In fact, the company is strategically leveraging AI to fortify its services.
Furthermore, given the company's robust financials, profitability, and positive analyst sentiment, GOOGL could be a solid buy now.
How Does Alphabet Inc. (GOOGL) Stack Up Against Its Peers?
While GOOGL has an overall POWR Ratings grade of B, equating to Buy, one could also check out other stocks within the Internet industry that are overall A (Strong Buy) rated: Yelp Inc. (YELP), trivago N.V. (TRVG), and Travelzoo (TZOO).
What To Do Next?
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GOOGL shares were trading at $129.28 per share on Wednesday afternoon, up $7.07 (+5.79%). Year-to-date, GOOGL has gained 46.53%, versus a 19.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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