The Alphabet (GOOGL) drop presents a buying opportunity and has made me bullish on the stock. While antitrust concerns weigh heavily on the stock, investors have forgotten about the company’s long-term potential and growth catalysts. Furthermore, the valuation looks quite attractive, especially when you assess the company’s financial growth rates.
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GOOGL’s Revenue and Earnings Continue to Rise
Turning to the company’s recent performance, Alphabet’s rising revenue and earnings prompt me to be bullish on the stock. While the company has been posting good financial numbers for several quarters, investors have forgotten about recent quarters. The antitrust news has stolen investors’ attention, so it’s good to bring our focus back to Q2 2024 numbers.
Specifically, revenue increased by 14% year-over-year in the quarter, while operating income jumped by 29% year-over-year. Advertising and cloud computing were key components that helped the company deliver impressive results.
Furthermore, artificial intelligence should result in revenue acceleration as more companies use Google Cloud to store their AI applications. The company still owns the two most popular websites—Google and YouTube—and will generate sales growth for many years.
Alphabet’s Valuation Is Attractive
Considering the stock’s current price levels, the recent dip has prompted my Buy rating since Alphabet’s stock only trades at a 19.5 forward P/E ratio. That’s the result of an excessive 20% drop from its July peak. Even the dividend has gotten more attractive, as the stock currently has a 0.53% yield.
Looking at comparable companies, Alphabet trades at a nearly identical valuation as UPS (UPS), which reported declining year-over-year revenue and net income in Q2 2024 and has a forward P/E ratio of 17.3. The tech giant also trades at a lower valuation than Home Depot (HD). Home Depot trades at a 24.75 forward P/E ratio, which has also been struggling with sales growth. Alphabet shouldn’t be valued the same as these companies because its financial growth rates are far stronger and more promising compared to those of UPS and Home Depot.
Therefore, investors will eventually notice the mismatch and bring Alphabet back to a $2 trillion market cap. Until then, investors can accumulate shares at a discount and enjoy an elevated dividend yield. Alphabet’s Q3 2024 earnings can serve as the catalyst. That earnings report is projected to come out at the end of October.
Google Cloud Continues to Soar
Meanwhile, while advertising has always been an area of strength, Alphabet’s rising cloud business gives me another reason to be bullish. Google Cloud is the third-largest cloud computing platform, and it should help the company achieve accelerated financial growth for several years.
As a testament to its growth, Google Cloud revenue reached $10.3 billion in the quarter, which is up by 29% year-over-year. That’s a higher growth rate than the company’s 14% year-over-year revenue improvement. Google Cloud revenue represented 12% of total revenue, and it should become a larger piece of the pie over time.
Importantly, Google Cloud isn’t in danger from antitrust hearings. Those concerns center around Google’s advertising network, although antitrust cases aren’t new for the tech giant. Google Cloud should continue to perform well due to artificial intelligence and the difficulty of switching from one cloud platform to another. Google Cloud only has a small percentage of the market relative to AWS and Azure, so it shouldn’t face much scrutiny from regulators.
Alphabet’s Profit Margin Focus Creates Opportunities
Transitioning to profit margins, Alphabet’s renewed focus on margins has created opportunities. Specifically, Alphabet’s profit margins have been expanding nicely in recent quarters, providing another reason to be bullish. For example, Google’s parent company closed the quarter with a 28% net profit margin, marking a 13% year-over-year improvement. Moreover, the company’s net profit margins nearly reached 30% in the first quarter of 2024.
This trend is similar to Meta Platforms’ (META) rising profits. Facebook’s parent company committed to a year of efficiency, which resulted in 73% year-over-year net income growth in the second quarter. Both tech giants seem to be looking for opportunities to trim costs and return value to their shareholders. They each offer dividends and conduct regular stock buybacks.
While there are differences, Meta Platforms’ profits have soared at a faster pace, Alphabet has delivered respectable earnings growth. Furthermore, Alphabet trades at a lower valuation, which should continue to become more attractive after it reports Q3 2024 earnings.
Is Alphabet Stock a Buy?
Considering all these factors, GOOGL stock is currently rated as a “Strong Buy“, with a projected 36% upside from current levels. The highest price target of $240 per share implies that Alphabet shares can gain an additional 60% from current levels.
See more GOOGL analyst ratings
The Bottom Line on Alphabet Stock
In conclusion, I remain bullish on Alphabet (GOOGL) due to a combination of factors. Despite the recent drop and ongoing antitrust concerns, the company’s long-term potential and strong growth catalysts are compelling. Alphabet’s rising revenue and earnings, coupled with an attractive valuation, reinforce my confidence in the stock. The company’s continued strength in advertising, rapid growth in Google Cloud, and impressive profit margins further support this positive outlook. Given these considerations, Alphabet’s stock presents a promising investment opportunity, and I believe the current price offers an attractive entry point.
