We came across a bullish thesis on Alphabet Inc. (GOOG) on Value Investing subreddit page by Goatofoptions. In this article, we will summarize the bulls’ thesis on GOOG. Alphabet Inc.’s share was trading at $171.14 as of Oct 29th. GOOG’s trailing and forward P/E were 22.70 and 19.30 respectively according to Yahoo Finance.
A user’s hands typing a search query into a Google Search box, emphasizing the company’s search capabilities.
Alphabet Inc. (GOOG), the parent company of Google, is a global tech leader, known for its dominance in search, advertising, and cloud services. Despite its solid track record, the stock has recently experienced a steep decline, driven by investor concerns over an ongoing antitrust lawsuit and potential competition from AI in the search market. These challenges, while significant, maybe overly reflected in Alphabet’s valuation, presenting a potential undervaluation opportunity relative to its long-term growth potential.
In Q2 2024, Alphabet reported robust earnings, with EPS rising to $1.89, a notable increase from $1.44 in Q2 2023, and total revenue reaching $84.7 billion, a 14% year-over-year growth. Google Cloud played a critical role in this expansion, posting a revenue increase to $10.35 billion from $8.03 billion in the previous year. However, YouTube’s ad revenue slightly missed targets, hinting at potential shifts in consumer engagement and the heightened competition in digital advertising—a potential pressure point for Alphabet’s ad-based revenue, although one that appears manageable given its vast market footprint.
The ongoing antitrust lawsuit remains a key concern, with allegations that Google’s market share—dominating 80-90% of U.S. search traffic—was achieved through anti-competitive practices. Yet, historical precedent suggests that the lawsuit may not lead to drastic structural changes, as Alphabet has weathered similar cases without losing its leading position. Concerns about AI impacting Google’s core search business have also weighed on the stock. While emerging AI-driven platforms may attract some users, Google’s substantial investment in its AI capabilities, including DeepMind and innovations in Google Search and Cloud, strongly positions the company to sustain its market share and innovate within AI and adjacent tech sectors.
Alphabet’s prospects are not limited to search and advertising; the company’s advancements in AI, cloud computing, and autonomous technologies underscore its growth trajectory. Google Cloud, though trailing AWS and Azure in market share, has maintained double-digit growth, bolstered by its specialized AI tools. In addition, Alphabet’s forward-looking investments in autonomous vehicles (Waymo) and smart home technology (Nest) highlight the company’s dedication to long-term innovation. Despite its diverse growth avenues, investor sentiment often fixates on regulatory risks and ad reliance, potentially undervaluing Alphabet’s overall potential.
Valuation metrics reveal that Alphabet currently trades at a relatively low PE ratio of 24, especially when compared to peers like Nvidia (64) and Microsoft (35). With an upcoming earnings report on October 29, 2024, and a consensus EPS forecast of 1.83 (up from 1.55 last year), strong performance is anticipated, positioning Alphabet as an attractive investment ahead of potential earnings-driven momentum.
Alphabet’s (GOOG) investment thesis is based upon its steady expansion in search, cloud, and AI, even amid regulatory hurdles and intensifying competition. With a comparatively attractive valuation among tech peers, Alphabet’s commitment to AI and innovation across sectors offers strong growth potential for long-term investors.
Alphabet Inc. is on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 165 hedge fund portfolios held GOOG at the end of the second quarter which was 165 in the previous quarter. While we acknowledge the risk and potential of GOOG as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than GOOG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.