Alphabet (NASDAQ:GOOGL) stock took a hit last week after its Q4 earnings report received a thumbs down from Wall Street. The market’s skepticism boiled down to one major concern: Alphabet’s hefty AI spending – and whether it will truly pay off.
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Management signaled no slowdown, projecting a $75 billion in FY25 capex to expand capacity for growing AI demand. But there are near-term challenges. Google Cloud’s Q4 revenue growth came in softer than expected, and capacity constraints could drag on Q1 results. Moreover, while Alphabet remains focused on long-term cost discipline, expenses are set to rise in 2025 due to higher depreciation from elevated capex and increased investments in AI and Cloud talent.
Yet, there’s a silver lining. Goldman Sachs’ Eric Sheridan, an analyst ranked in the top 3% of Wall Street stock pros, highlights “continued revenue momentum,” driven by solid performance in Search across all verticals and better-than-expected YouTube Ads results. The company also pointed to positive early engagement with AI Overviews, particularly among younger users, progress in closing the monetization gap for YouTube Shorts, and optimism surrounding new AI initiatives such as Gemini, Project Mariner, and Project Astra.
Meanwhile, operating margins also beat expectations, despite significant AI-related investments. Additionally, the company reinforced its commitment to shareholder returns through ~$15.51 billion in share repurchases in the quarter ($62.23 billion for FY2024) and a $0.20 per-share cash dividend.
Alphabet also made the case that the Cloud business is well-positioned to benefit over the medium-to long-term from the growth of generative AI and a “more normalized overall enterprise computing landscape.” Again, the key question for investors, says Sheridan, will be how the increased capex translates into long-term returns and “sustained revenue growth.”
All told, looking at the big picture, Sheridan remains a firm GOOGL bull.
“Away from any short-term debates, we continue to view Alphabet as well-positioned against both the current (mixture of desktop and mobile utility) and potential future (AI/ML; personalization; lowered friction to applications) computing landscapes,” the 5-star analyst said. “We continue to advocate that the combination of AI distribution at scale (collection 1b+ user applications) and scale of compute to both invest and drive efficiencies remain as a dual under-appreciated narrative in terms of AI over the long-term, particularly as we move from the ‘infrastructure’ to ‘platform’ and ‘application’ layers of AI monetization.”
Accordingly, Sheridan rates GOOGL shares a Buy while his $220 price target makes room for 12-month returns of 18%. (To watch Sheridan’s track record, click here)
He’s not alone in his bullish stance – 26 other analysts share his optimism, while 10 remain on the sidelines with Hold ratings. As a result, the stock claims a Moderate Buy consensus rating. Based on the $215.85 average price target, GOOGL shares could climb ~16% in the coming year. (See Alphabet stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.