If I were to choose a single stock for investment in 2024, Alphabet (GOOGL) (GOOG) would be at the top of my list. This company holds a prominent position in the technology industry, showcasing its involvement and leadership in various technological innovations. Serving as the parent company of Google and several subsidiaries, Alphabet dominates in search technology, online advertising, cloud computing, and mobile operating systems.
Alphabet also aggressively invests in emerging technologies, including artificial intelligence (AI), machine learning, and autonomous vehicles. These investments position Alphabet as a high-reward, long-term investment. With this backdrop, let’s delve deeper to understand why Alphabet is poised for long-term success.
However, before that, it’s imperative to stress the importance of a diversified investment approach. While Alphabet may present a compelling opportunity, investing solely in one stock carries inherent risks. Building and maintaining a diversified portfolio remains critical for risk reduction.
What Does Alphabet Do?
Alphabet owns a diverse range of businesses, with Google being the largest among them. The company categorizes Google’s operations into two main segments: Google Services and Google Cloud. Additionally, all non-Google businesses are collectively labeled as "Other Bets."
Within Google Services, the company’s key products and platforms, such as Search, YouTube, Android, Gmail, Chrome, ads, hardware, Google Maps, Google Drive, and Google Photos, have gained widespread global adoption. The segment primarily generates revenue via advertising. Beyond advertising, income is sourced from app and in-app purchases, hardware sales, and subscriptions to services like YouTube Premium.
As for Google Cloud, the company provides advanced technology solutions in areas such as cybersecurity, analytics, data management, AI, machine learning, and infrastructure. Additionally, it offers Google Workspace, featuring communication and collaboration tools like Gmail, Docs, Drive, Meet, and others.
Alphabet’s “Other Bets” include businesses that are in varying stages of development, ranging from those in the research and development phase to those at the initial stages of commercialization.
AI to Reaccelerate Alphabet’s Growth
Alphabet will likely see a significant reacceleration of revenue growth in the coming years, driven by its efforts to infuse AI into its core products, primarily Search, YouTube, and Cloud.
The predominant contributor to Alphabet's revenue is Google Search, constituting approximately 57% of total revenue in the first nine months of 2023. The infusion of generative AI capabilities into Search through the Search Generative Experience is expected to enhance competitiveness and uphold its leadership in the online advertising ecosystem. Moreover, Alphabet's AI-driven offerings, including Search and Performance Max, have garnered substantial interest from retailers, showcasing a solid return on investment. This trend suggests a growing demand for Alphabet’s AI-powered advertising solutions, leaving them well-poised to contribute to overall revenue growth.
Besides Search, the company is working on expanding its cloud platform by introducing new features and capabilities, with a strong focus on AI-driven functionalities. This strategic move is expected to draw more customers to its platform. Notably, Google Cloud revenue witnessed a significant 26% year-to-year increase in the first nine months of this year, driven by robust performances in its infrastructure and platform services. Further, Google pointed out that over 60% of the world’s 1,000 largest companies are already its customers.
Looking ahead, Google Cloud Platform and Workspace are poised to benefit from the integration of AI solutions, including advanced infrastructure and services such as Vertex AI and Duet. Moreover, Google recently unveiled Gemini, its highly anticipated next-generation large language model, which is set to support the company’s Search, Ads, Chrome, and Duet AI functionalities.
In summary, the company’s ability to leverage generative AI functionality across its key product lines, continued innovation, and growth in digital advertising is anticipated to accelerate its growth, thereby propelling its stock higher.
Returning Cash to Shareholders Could Act as a Catalyst
The tech giant also remains well-positioned to enhance its shareholders’ returns through ongoing share repurchases, which should act as a catalyst.
Alphabet generated a substantial free cash flow of $78 billion over the trailing 12 months. Additionally, by the end of the third quarter, the company held $120 billion in cash and marketable securities. Notably, Alphabet allocated $46.2 billion towards share repurchases in the first nine months of 2023.
Looking forward, Alphabet's robust balance sheet and cash flow provide a solid foundation to support its key growth initiatives, including acquisitions. This financial strength will also empower the company to return substantial cash to its shareholders through ongoing buyback programs.
Bottom Line
Alphabet dominates the search, digital advertising, and cloud businesses. The company is integrating AI into its core products, which bolsters its competitive edge and drives its market share. Moreover, Alphabet's robust balance sheet and cash flows establish a solid groundwork for ongoing expansion and the capacity to amplify returns for shareholders.
This is mirrored in analysts’ positive outlook on GOOGL. Out of the 37 analysts covering Alphabet stock, 29 have a “Strong Buy” recommendation, two analysts recommend “Moderate Buy,” and six have a “Hold.” Moreover, the average price target is $152.38, which implies about 8.6% upside potential from current levels.
