Alphabet (NASDAQ:GOOG) stock looks better and better.
Remember, the company is not just about Google’s search services; it’s a major player in quantum computing too. Their 72-qubit processor, Bristlecone, reduces data testing errors and works smoothly with critical software and field control electronics.
Alphabet reaffirmed its dedication to this field by establishing Sandbox AQ, a private organization focused on quantum computing and AI in 2022.
While it may seem like Alphabet’s focus on quantum computing is a departure from its core business, it actually has the potential to greatly impact Google’s advertising revenue. I will discuss more of the business and stock in this article.
Things to Watch
Microsoft’s (NASDAQ:MSFT) AI partnership with OpenAI initially appeared to give it an edge over Alphabet, but the perception is changing.
While Microsoft leads in AI, but Alphabet has made significant strides in recent months, introducing various generative AI applications. Alphabet introduced Bard Extensions, a chatbot-like tool for Google accounts, this week.
It retrieves information from Gmail, Google Docs, Maps, and more.
There have been recent insider transactions happening with Alphabet.
Milestone Advisory Partners acquired 1,740 shares of GOOG stock valued at around $210,000 during Q2 2023, as reported in their SEC filing. Director Ann Mather sold 380 shares on June 26th at an average price of $121.42, totaling $46,139.60. After the sale, Mather retained 4,700 shares worth approximately $570,674.
These moves reflect institutional investors and hedge funds’ confidence in Alphabet’s growth potential.
Together, institutional investors now own 27.13% of Alphabet’s outstanding shares. This metric alone speaks to the quality and stability Alphabet provides portfolios around the world.
Fundamentals Remain Strong
Assessing a company’s valuation is an attempt to put a price on a company’s future earnings, discounted back into present terms.
Investors can value a company simply by its market capitalization (total number of shares multiplied by the current price per share), take some price-earnings or price-sales ratios into consideration, or do one’s own Discounted Cash Flow (DCF) analysts.
I prefer the latter to come to a true intrinsic value of what a share is worth, but it’s up to each investor.
In valuing Alphabet, key figures come into play. The company’s market cap, now around $2 trillion, doubled from March 2020 lows. Alphabet’s enterprise value, considering debt, is at $1.82 trillion, more than double the previous year’s $889.66 billion.
Alphabet’s price-to-sales ratio is 8.3-times, up from 6.1-times in Q3 2020. A lower price-sales ratio is typically better, but the growth rate matters. The company’s price-sales ratio has decreased since Q2 2021 (8.7-times, but it’s still higher than a year ago). In contrast, Alphabet’s price-to-book ratio surged from 4.8-times to 7.9-times since Q3 2020, contrary to the usual value investor preference for lower price-book ratios.
While Alphabet’s valuation ratios have surged, it’s a function of quality in the market and projections about future growth that are driving these moves.
It’s A Great Buy
Investors have recognized Alphabet’s potential in the generative AI space, driving GOOG stock up by 36.2% in the past six months.
After this rebound, the question is whether GOOG stock will continue to rise or face a reversal. AI’s significant impact on Alphabet’s finances will take time, potentially making GOOG susceptible to a pullback as initial excitement subsides.
Despite the gradual nature of benefiting from this trend, two factors could support and potentially enhance recent stock gains: ongoing recovery in digital advertising demand and cost-saving measures implemented in the past year.
Q2 2023 results for Alphabet and its peers indicated a recovery in the digital ad business. While we’ll have to wait for the next earnings releases in late October for confirmation, if this trend persists, investors may continue driving GOOG stock higher in anticipation of strong future quarters.
While you might assume Alphabet’s cost-cutting measures have already influenced results, that’s not necessarily the case. The company is still making crucial efficiency-driven decisions that could contribute to ongoing earnings beats.
When you factor in the potential for more AI advancements, it becomes evident that there are compelling factors to support GOOG stock’s upward trajectory.
On the date of publication, Chris MacDonald did not have (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.
