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Alphabet (GOOG) is trading sharply higher ahead of the bell today, on pace to join the ranks of $2 trillion companies after the company released better-than-expected Q1 earnings. Importantly, the Google parent is now getting some much-desired “AI respect,” as it has refuted the perception that it is lagging behind its Big Tech peers in pivoting to artificial intelligence.
As Alphabet rises to new record highs, let's explore how high the stock could go, beginning with a brief look at the company’s Q1 earnings.
Alphabet’s Q1 Earnings Snapshot
Alphabet reported revenues of $80.54 billion in Q1, which were 15% higher YoY and ahead of the $78.59 billion that analysts expected. Total advertising revenues rose to $61.66 billion, with YouTube accounting for $8.09 billion. Google Cloud revenues rose over 28% YoY to $9.57 billion, slightly ahead of the $9.35 billion that analysts expected.
The Cloud segment’s operating income rose over four-fold to $900 million. The company also managed to trim losses in its Other Bets segment. As its shares plunged in 2022, Alphabet faced a lot of flak for massive losses in its new businesses. However, like fellow Big Tech companies, it embarked on an aggressive belt-tightening exercise and cut costs across the board, including mass layoffs. Alphabet had 180,895 employees at the end of Q1 2024, which is 9,816 fewer than the corresponding quarter last year.
Alphabet Initiates a Dividend
Alphabet also initiated a dividend, and announced a quarterly dividend of $0.20, along with a $70 billion cash buyback program. The Mountain View-based company seems to have taken a page out of the Meta Platforms (META) book, as the Mark Zuckerberg-led company initiated a divided and announced a mega-buyback after its Q4 earnings call.
More recently, the market's reaction to Meta’s Q1 earnings was quite negative, and the stock lost over 10% in yesterday’s trade.
Google Gets Some Much-Deserved ‘AI Respect’
While Alphabet stock rebounded last year, in line with the recovery in tech names, it did not receive the kind of “AI respect” as its other Big Tech peers – and there are good reasons for that. Its Bard chatbot had a disappointing debut, and after the company rebranded it as Gemini, the new offering was marred by controversy, as some responses were flagged as racist, sexist, or even factually inaccurate.
Alphabet has since upped its AI game, and made multiple exciting announcements at the Google Cloud Next 2024 event earlier this month. These included an AI chip, audio processing capabilities to Gemini 1.5 Pro, a new workspace app named Vids, as well as enhancements to its Workspace suite.
GOOG stock rose to record highs following the event that was held in Las Vegas, and is on track to open at new highs today following the Q1 earnings.
Alphabet’s AI Strategy Looks Fine-tuned Now
Alphabet seems to have fine-tuned its AI initiatives, and is quite optimistic about their success. During the Q1 earnings call, Alphabet CEO Sundar Pichai said, “We are seeing early confirmation of our thesis that this (AI) will expand the universe of queries.”
Pichai, who termed the AI transition as “a once-in-a-generation kind of an opportunity,” added, “it clearly improves the user experience, users are telling us that, and we are seeing it in our metrics, and we'll continue evolving it through the course of this year.”
GOOG Stock Forecast
As expected, analysts have gone into overdrive to raise Alphabet’s target price. While Jefferies and Barclays both revised GOOG's target price to $200, Oppenheimer analyst Jason Helfstein lifted it to $205. According to Helfstein, higher ad revenues will help to drive operating leverage at Alphabet, despite increased investments toward AI. His target price is almost 30% higher than yesterday's closing prices.
GOOG stock still has room to run higher, considering its reasonable valuations. It trades at a next 12-month (NTM) price-to-earnings multiple of just over 22x - the second lowest among “Magnificent 7” stocks. Meta currently has the lowest multiple at 21.6x, thanks to the crash in its shares following the Q1 earnings release.
While there are regulatory headwinds to consider (which impact pretty much the entire Big Tech space), Alphabet looks like a stock worth buying and holding, despite the pop today, as it finally gets the same valuation respect that its Big Tech peers enjoy amid the AI pivot.
On the date of publication, Mohit Oberoi had a position in: META , GOOG . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
