With Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) stock poised to benefit tremendously from the rapidly rebounding digital advertising market and the proliferation of artificial intelligence (AI), Alphabet’s shares are definitely worth buying at this point.
What’s more, the company is growing rapidly, while the valuation of GOOG stock remains attractive.
The U.S. Digital Ad Market’s Comeback and the AI Revolution
In the first half of 2023, the spending by U.S. marketers on online search and e-commerce ads climbed 9% versus the same period a year earlier. And in 2024, search ad revenue is predicted to soar 17%. Of course, that’s great news for Alphabet, whose Google search engine is the runaway leader in the category. I predict that, as worries about a U.S. recession fade and economic growth continues to be strong, companies could spend even more than is predicted.
Meanwhile, the proliferation of AI will greatly boost spending on cloud infrastructure, benefiting Alphabet’s Google Cloud unit. That’s because AI relies on the large-scale infrastructure offered by massive cloud service providers. Morgan Stanley (NYSE:MS) also agrees that Google Cloud will get a boost from the proliferation of AI. And that thesis may already be starting to play out, as Google Cloud produced operating profits for the first time in Q1 2023. Further, it also generated an operating profit last quarter.
Also noteworthy is that Alphabet has enhanced its AI-powered chatbot, Bard. Additionally, the chatbot can check itself by scanning websites to evaluate its responses. This also allows users to review the information that Bard found. Not surprisingly given these points, Investment bank Wedbush views Alphabet as a significant force in the AI sector.
Over the longer term, Bard should become a significant revenue generator for Alphabet. It is likely they will begin charging users for the service, as Microsoft (NASDAQ:MSFT) is already doing with its CoPilot tool. And encouragingly, Bard use from April to May nearly tripled. The jump suggests that many users were pleased with the product.
Moreover, Alphabet is developing a new AI tool called Gemini which can read and summarize excerpts and compose regular text and code.
Strong Growth and a Wonderful Balance Sheet
Alphabet’s top line rose 7% in the second quarter versus the same period a year earlier. At the same time its net income jumped 12.5% year-over-year (YOY). And analysts, on average, predict that its revenue growth accelerated to nearly 10% YOY last quarter. This forecasts that profit growth is also likely to increase in Q3.
The company has $118 billion of cash and only $29.4 billion of debt. As a result, GOOG is well-positioned to benefit from high interest rates because it can interest on its huge cash hoard. Additionally, the company can use a portion of its excess funds to make acquisitions that will boost its financial results over the longer term.
Low Valuation and a Great Performance
Alphabet’s forward price-earnings ratio of 20.9 times is quite low.
Also noteworthy is that Investor’s Business Daily gives Alphabet a very high Composite Rating of 98 and a Relative Strength rating of 95, showing that it has tremendously outperformed the stock market over the last year.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
