Alphabet stock (NASDAQ:GOOGL) (NASDAQ:GOOG) is now my largest tech holding, making up about 8% of my portfolio. Lately, I have added multiple times to my position, as Alphabet’s Q4 results showed strong revenue growth, expanding margins, surging profits, and increasing capital returns. Further, even though Alphabet retains double-digit top and bottom-line growth prospects, the stock appears cheap both independently and compared to the Magnificent Seven stocks. Thus, I remain bullish on the stock.
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Q4 Results Reinforced My Conviction in the Stock
I have recently increased my Alphabet position multiple times, with its Q4 results further reinforcing my conviction in the stock’s bull case. To begin with, Alphabet posted reaccelerating revenue growth of 13% to $83.6 billion — a notable uptick from the previous quarter’s 11% and last year’s 1%.
Furthermore, EPS surged 56% to $1.64, as the bottom line was also boosted by an expansion in Alphabet’s operating margin from 24% to 27%. Notably, Q4’s revenues and EPS beat prior consensus estimates by 1.2% and 2.5%, respectively, surpassing market expectations. Let’s take a closer look.
Google, YouTube Drive Strong Advertising Momentum Backed by AI
Strength in Google and YouTube were the primary drivers of Alphabet’s revenue growth in Q4. Google Search revenues surged 13% to $48 billion, while YouTube advertising revenues grew by an even more significant 16% to $9.2 billion. The results benefited from an improving advertising environment, particularly in retail, and, interestingly, from Google’s investments in AI over the past year.
During the Q4 earnings call, Sundar Pichai, Google’s CEO, underscored the transformative impact of AI on the company’s growth across various platforms. Pichai emphasized the critical role of generative AI in improving Search. By utilizing generative AI, Search has addressed a broader spectrum of information needs and responded to novel queries with diverse perspectives. This, in turn, has significantly bolstered ad performance metrics for advertisers.
Then, on YouTube, the company continues to reap the rewards of prioritizing a creator-first economy within its platform. By offering creators unparalleled opportunities to monetize their content and establish their own businesses, YouTube has become the preferred growth channel for many creators. This has led to an influx of content, which, in turn, has led to increased viewership and, thus, growing ad revenue.
Once more, the power of AI, specifically Google’s generative AI, is pushing these capabilities to extraordinary levels. Think about this: with just a smartphone, anyone can effortlessly change their backdrop, eliminate unnecessary elements from the background, and easily translate their videos into numerous languages without a big studio budget. The success of these initiatives is evident in YouTube’s staggering numbers, with Shorts now boasting over two billion logged-in users per month and 70 billion daily views.
Google Cloud: Profits Are Snowballing
Alphabet’s Google Cloud division also posted impressive numbers, with the main highlight, for me, being its snowballing profits. Google Cloud’s unit economics continued to improve, with Q4 being the division’s fourth consecutive profitable quarter. Specifically, Google Cloud revenue growth came in at an impressive 26%, accelerating from Q3’s revenue growth of 22%, driving robust economies of scale. Consequently, the division’s operating margin surged to 9.4%. The year before, it was negative.
With Duet AI, Google Cloud’s AI-powered collaborator, the company now empowers top-tier brands such as PayPal (NASDAQ:PYPL) and Deutsche Bank (NYSE:DB) to supercharge developer productivity. At the same time, AI capabilities offered in the Cloud facilitate retailers like Aritzia (OTC:ATZAF) and Gymshark to understand their customers by breaking down priceless insights. As Alphabet utilizes Google Cloud to cater to each customer’s needs, I believe its momentum is set to continue for many quarters.
Record EPS & Capital Returns, Yet the Stock Remains Cheap
Alphabet’s strong revenue growth and margin expansion across the board led to the company posting record quarterly EPS of $1.66 for Q4 and a record annual EPS of $5.84 for FY2023. In turn, the company was able to afford increased capital returns to reward shareholders, with share repurchases for the year reaching a record $61.5 billion, up from $59.3 billion last year.
At its current market cap, this implies a buyback yield of 3.5%, which I find rather substantial given that Alphabet is expected to keep growing in the double digits. Specifically, consensus estimates for FY2024 point toward revenues of $342.41 billion and EPS of $6.76, suggesting year-over-year growth of 11.4% and 16.6%, respectively.
This leads us back to a crucial point I highlighted earlier in this article. Here, you have Alphabet, returning 3.5%+ per annum through buybacks, growing in the double-digits, and being at the forefront of the AI craze, Yet its stock is currently valued at just under 21 times Wall Street’s projected EPS for the year.
Notably, Alphabet is arguably the cheapest stock among the glorified “Magnificent Seven.” I’m not a fan of drawing direct comparisons among the Magnificent Seven as many investors do, given that their business models are widely different. However, this analogy highlights that Alphabet stock has not seen the same excessive investor exuberance most of the companies in this group have. Here are their forward P/Es.
Alphabet’s below-average valuation could serve as a potent catalyst for future upside, particularly in contrast to the potential valuation contractions that might affect the rest of Magnificent Seven should their earnings growth fall short of the current lofty expectations.
Is GOOGL Stock a Buy, According to Analysts?
Regarding Wall Street’s view on the stock, Alphabet features a Strong Buy consensus rating based on 29 Buys and eight Holds assigned in the past three months. At $164.56, the average Alphabet stock price target implies 17.11% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell GOOGL stock, the most profitable analyst covering the stock (on a one-year timeframe) is Mark Kelley from Stifel Nicolaus, boasting an average return of 28.48% per rating and a 90% success rate. Click on the image below to learn more.
The Takeaway
Overall, Alphabet’s Q4 results, marked by accelerated revenue growth, margin expansion, and record-breaking EPS, have solidified my bullish stance on the stock.
Google’s AI-driven innovations, particularly in Search and YouTube, keep driving advertising momentum, while Google Cloud’s snowballing profitability reflects its growing significance within Alphabet’s business mix.
Despite its lively performance and growing capital returns, Alphabet appears undervalued both when assessed independently and when compared to its Magnificent Seven counterparts. This adds a layer of safety to its investment case and has also contributed to my decision to increase my position in the stock lately. Thus, Alphabet will remain a pillar tech position within my investment portfolio.
