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Unlocking the Future: Analyzing Alphabet’s Growth Potential

Unlocking the Future: Analyzing Alphabet’s Growth Potential

2024 has seen tech stocks surging ahead, with the Nasdaq-100 Technology Sector index boasting impressive 9.8% gains. However, Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) has faced a stagnant period, failing to ride the wave of success so far this year.

Despite a promising start in 2024, Alphabet disappointed investors with its ad revenue performance, raising concerns about its competitive edge in the generative artificial intelligence (AI) market following the Gemini chatbot controversy.

Can Alphabet reshape investors’ outlook and deliver robust returns over the next five years?

Accelerating Growth Imperative for Alphabet

In 2023, Alphabet reported a total revenue of $307.4 billion, marking a 10% upsurge in constant currency terms from the previous year. Though a solid performance, this growth rate lagged behind the 14% leap observed in 2022. Projections suggest Alphabet’s revenue growth to marginally improve in 2024, climbing 11.4% to reach $342.6 billion.

The anticipated trajectory of Alphabet’s growth indicates a slight deceleration in the years ahead, symptomatic of potential challenges the tech giant could face.

One primary concern is Meta Platforms’ (NASDAQ: META) threat to Alphabet’s ad business. Google Advertising revenue experienced a mere 6% uptick in 2023, reaching $237.8 billion. In contrast, Meta Platforms witnessed a 16% surge in advertising revenue, totaling $132 billion last year, outpacing the industry’s 10.7% growth recorded by eMarketer in the digital ad market. This trend signifies Meta’s encroachment on Alphabet’s market position, hinting at a possible loss of ground by Alphabet.

Moreover, the competition in Alphabet’s cloud computing segment poses another hurdle. While Google Cloud revenue spiked by an impressive 26% year over year in Q4 FY2023 to $9.2 billion, Microsoft’s Azure cloud witnessed a 30% growth during the same period, fueled by its AI-centric cloud services’ broader adoption.

Investors seem to favor other ‘Magnificent Seven’ stocks over Alphabet this year, signaling a preference for entities using AI technology more effectively to bolster financial performance.

Valuation Supporting Alphabet as an Investment

Alphabet’s peers in the Magnificent Seven group have witnessed substantial stock price surges, elevating their valuations. This places them at pricey levels compared to Alphabet.

Acquiring Alphabet at its current valuation might prove to be a wise long-term investment. The company’s prosperous cloud business and potential advancements in the generative AI sector support this notion. Analysts, such as JPMorgan’s Doug Anmuth, remain optimistic about Alphabet’s potential resurgence in the generative AI domain.

With the stock currently trading at 23 times trailing earnings and 20 times forward earnings—offering a discount to the Nasdaq-100’s earnings multiple of 32—investors are presented with an attractive entry point.

Analysts predict a 19% annual growth in Alphabet’s earnings over the next five years. Based on its 2023 earnings per share of $6.79, the company could see this figure escalate to $13.84 per share in half a decade. Should Alphabet’s growth trajectory pick up by then and the market respond with a higher earnings multiple, this tech giant could yield substantial returns.

Even if in five years, Alphabet is trading at 24 times its forward earnings, equivalent to its five-year average forward price-to-earnings ratio, its stock price could soar to $332. This represents a 138% surge from current levels, underlining the attractiveness of acquiring Alphabet while it remains reasonably priced.

Before considering investing in Alphabet, one must ponder the advice of the Motley Fool Stock Advisor analyst team, who have identified what they believe to be the 10 best stocks for investors—a list that excludes Alphabet. These stocks are projected to yield significant returns in the upcoming years.

Suzanne Frey, an executive at Alphabet, serves on The Motley Fool’s board of directors. JPMorgan Chase is an advertising associate of The Ascent, a Motley Fool company. Randi Zuckerberg, former Facebook director and sister to Meta Platforms CEO Mark Zuckerberg, sits on The Motley Fool’s board. John Mackey, past CEO of Whole Foods Market, an Amazon subsidiary, also serves on The Motley Fool’s board. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, JPMorgan Chase, Meta Platforms, Microsoft, Nvidia, and Tesla. Furthermore, The Motley Fool endorses certain options and has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views and opinions of Nasdaq, Inc.