Alphabet, the parent company of Google, has experienced strong growth and is presenting itself as a compelling investment opportunity. After a decline in 2022, Alphabet’s shares saw an impressive 58% increase last year, outperforming the Nasdaq Composite Index. This resurgence has generated renewed optimism among investors regarding Alphabet’s future prospects.
In 2022, the digital advertising market faced challenges due to rising interest rates and inflationary pressures. As consumers had less discretionary income, advertisers were hesitant to spend money on targeting them. Consequently, Alphabet reported weaker growth compared to previous years. However, the company’s fortunes changed in 2023 as revenue growth accelerated in each of the last three quarters. The retail sector’s increased ad spending played a significant role in this resurgence, and YouTube’s revenue exceeded Wall Street expectations.
Alphabet is well-positioned to maintain its dominance in the digital advertising industry, where it currently commands a 39% global market share. Projections suggest that the sector’s worldwide revenue will exceed $1 trillion by 2030, indicating sustainable long-term growth for Alphabet.
Concerns about Alphabet’s future growth are somewhat overblown. Analyst estimates anticipate a compound annual sales growth rate of 10% between 2022 and 2025, with diluted earnings per share increasing at a 19% annualized rate.
In addition to digital advertising, Alphabet stands to benefit from the growth of the cloud computing sector. Google Cloud saw a 22% revenue increase in the third quarter of 2023, reaching a total of $8.4 billion. The company also achieved its third consecutive quarter of positive operating income, a promising trend.
Alphabet’s cloud computing platform, Google Cloud, holds significant value as it allows the company to introduce new artificial intelligence (AI) features like generative AI and machine learning capabilities. This strengthens Google Cloud’s appeal to its clients, which include well-known companies such as Lyft, Major League Baseball, Walgreens Boots Alliance, and PayPal.
Streaming entertainment’s continued rise will also contribute to Alphabet’s growth, with its user-generated video platform, YouTube, boasting 2.7 billion users. In the United States, YouTube attracts more TV viewing time than any other streaming service, including Netflix. Therefore, YouTube’s importance within Alphabet is expected to grow over time.
While Alphabet’s shares may appear expensive based on a price-to-earnings (P/E) ratio of 27, they still represent a discount compared to other leading tech stocks. Considering Alphabet’s dominant position, strong growth prospects, and its ability to outperform the S&P 500, investing in the company remains a wise decision.
In conclusion, Alphabet’s strong growth outlook, particularly in the digital advertising and cloud computing sectors, makes it a compelling investment opportunity. With its commanding share of the digital ad market and continued innovations in AI through its Google Cloud platform, Alphabet is well-positioned for sustainable long-term growth. While investors should exercise caution due to the stock’s current valuation, adding Alphabet shares to one’s portfolio represents a smart decision.
