Alphabet stock (GOOGL) (GOOG) has experienced a significant decline recently, driven by a post-earnings sell-off, further compounded by a broader market downturn. Despite this dip, the company’s underlying performance remains exceptionally strong. In its Q2 results, Alphabet topped Wall Street estimates on both revenue and earnings, showcasing robust momentum. At the same time, the recent sell-off has made Alphabet’s valuation particularly attractive, reinforcing my bullish stance on the stock.
Q2 Results: A Compounding Machine on Display
Alphabet’s Q2 results once again reminded us of what a compounding machine the company is. At this point, Alphabet is a very mature company that has been around for roughly two decades. Yet, it continues to post double-digit top and bottom-line growth rather effortlessly to this day.
Revenues jumped to $84.7 billion, as you can see in the image below, beating consensus estimates by nearly half a billion dollars. The 14% revenue growth also marked a significant acceleration from the previous year’s growth of 7%. Further, EPS came in at $1.89, also beating Street estimates by a margin of $0.05 and celebrating an even more significant jump of 31.3%. Let’s take a deeper look.
Search, YouTube Capitalize on Rising Ad Demand, AI Advancements
Alphabet’s remarkable growth in Q2 was primarily driven by the sustained momentum of its AI-powered advertising solutions, coupled with a strengthening advertising environment. These factors significantly boosted revenues for both Google Search and YouTube.
In Google Search, for instance, innovations like AI overviews and advanced query handling have enhanced user engagement and satisfaction, leading to rising search activity and ad placements. This contributed to a 14% revenue increase.
On YouTube, advancements in AI, such as improved ad targeting and automated creative generation, added to a 13% increase in ad revenues. AI-driven features, including dynamic ad formats and optimized viewer engagement, have boosted ad performance and improved monetization, reinforcing YouTube’s status as a top platform for both creators and advertisers.
These figures highlight Alphabet’s strong position in the space, even as AI continues to reshape it. It’s clear that Alphabet’s control over extensive data and critical platforms gives it a significant edge. Do you remember when there were rising worries about upcoming competitors (specifically OpenAI) possibly overshadowing Alphabet a couple of years ago? It’s fascinating to see how Alphabet has not only weathered those early concerns but has also capitalized on its assets to solidify its leadership in the market.
Google Cloud: Margin Expansion Continues, Elevates Profitability
Google Cloud also contributed greatly to Alphabet’s top-line growth and overall profitability, with the segment achieving a substantial margin expansion. In particular, Alphabet’s Cloud business crossed the $10 billion revenue mark for the first time and posted a year-over-year increase of nearly 29%, mainly due to the growing adoption of their AI tools like Gemini and Trillium. These tools attracted a growing number of developers and enabled businesses to build and deploy powerful AI applications more efficiently.
The continuous expansion of data centers and infrastructure has further supported this growth while also improving service delivery and unit economics. Consequently, the segment’s operating margins remained on the rise, landing at 11.3%, up from 4.9% in the prior-year period.
It’s worth noting that Google Cloud has experienced margin expansion every quarter over the past six quarters, significantly boosting Alphabet’s overall margins and, thus, EPS growth. Specifically, Alphabet’s total operating margin jumped to 32% from 29% last year, leading to an impressive EPS increase of over 31%.
Not only did EPS growth notably outpace the growth in underlying revenue, but when you step back and consider how impressive it is for a mature company like Google to grow earnings at such a rate, it’s truly mind-blowing.
Alphabet Stock Is Surprisingly Cheap, Post-Plunge
Alphabet’s Q2 results showcased impressive growth, yet the stock underwent a notable plunge afterward. Consequently, its valuation has become surprisingly cheap, in my view. Currently trading at just under 21 times its projected EPS for the next 12 months, the stock doesn’t remotely reflect the company’s strong growth prospects, moat, or overall market position.
Wall Street anticipates continued EPS growth over the medium term, suggesting that Alphabet’s current valuation offers easy upside potential from today’s price levels. Even today’s interest rate environment doesn’t excuse this multiple. Alphabet’s tremendous cash reserves alone yielded $1.09 billion in interest income in Q2, directly benefiting from elevated rates. As a result, I believe today is the perfect time to consider GOOGL stock.
Is GOOGL Stock a Buy, According to Analysts?
Examining Wall Street’s view on the stock, Alphabet features a Strong Buy consensus rating based on 32 Buys and seven Holds assigned in the past three months. At $205.08, the average Alphabet stock price target suggests 20.9% upside potential.
See more GOOGL analyst ratings
If you have yet to decide 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, featuring an average return of 29.54% per rating and an 88% success rate. Click on the image below to learn more.
The Takeaway
Despite its strong results, Alphabet’s recent stock decline has formed a compelling buying opportunity, in my view. The company’s revenue and earnings exceeded expectations due to organic growth, AI-driven advertising, and Google Cloud’s margin expansion. With the stock now trading at what appears to be a cheap valuation against its growth prospects, this dip presents an attractive point for investors to initiate or bolster their positions. I am certainly planning to add to mine.
