Shares in Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL), parent company of Google and YouTube, have experienced a strong surge higher over the past twelve months. Yet as GOOG stock pulls back after hitting a new all-time high, are shares peaking in price?
After all, since last year, the tech giant’s efficiency efforts have affected the overall bottom line. The rollout of Google Gemini has mitigated concerns that the company has become an “AI also-ran” relative to Microsoft, an early mover in the generative artificial intelligence space.
All of this has arguably been already baked into GOOG’s valuation. However, what has perhaps not been fully factored-in is the company’s cloud computing catalyst. The rise of AI has benefited this segment to the greatest degree.
If Google Cloud experiences further strong growth thanks to this trend, in turn, this may result in better-than-expected growth for Alphabet overall. In two ways, this could bode well for GOOG’s price performance in the coming years.
Alphabet Stock: A New Approach is Needed
After declining in 2022, from $5.69 to $4.59 per share, Alphabet’s overall earnings hit a new all-time annual high in 2023, rising to $5.84 per share. In recent quarters, earnings growth re-acceleration has continued.
A rebound in digital ad demand played a big role in this, but so too did other factors. These other factors include the above-mentioned positive impact of Alphabet’s efficiency efforts.To put it in more blunt terms, cost reduction efforts.
During 2023, Google layoffs totaled 12,000 employees. So far in 2024, the company has continued to engage in layoff rounds.
Severance costs partially outweighed the initial impact of the 2023 layoffs. They will make a greater impact on this year’s fiscal results. Still, GOOG stock is up 46% since last July.
The resultant improvements to profitability from last year’s layoffs is likely already been taken into account.
Again, Alphabet’s AI search catalyst may be baked-in already as well. Anticipated GenAI tailwinds for search are another reason why investors have bid up GOOG. For now, they are watching and waiting to see if Google’s Gemini AI platform does more than merely keep the competition at bay.
Cloud Computing to the Rescue
Alphabet’s digital advertising revenue increased by 13% during Q1 2024. Although a strengthening of digital ad demand may continue in the immediate-term, a few quarters from now digital ad growth could slow down.
GenAI progress has boosted the Alphabet stock price, but again, it’s still unclear how much positive affect integrating AI into Google’s search platform will have on results.
After tackling the low-hanging fruit, Alphabet will soon reach a point where it’s cutting bone, not fat. Fortunately, for extending Alphabet’s growth runway, Google Cloud could come to the rescue. At least, based on recent results and trends.
During Q1 2024, Google Cloud’s revenue increased by around 28.5% on a year-over-year basis. Operating income jumped fivefold, from $191 million to $900 million.
In the quarters ahead, revenue growth could continue to come in at a health clip. Chalk this up to continued strong AI-driven demand for cloud infrastructure services.
Meanwhile, Alphabet may continue to turn this once unprofitable segment into a major profit center. In turn, potentially resulting in the company not only meeting, but beating, earnings expectations in 2024, 2025, and beyond.
The Sky’s Still the Limit for GOOG
Based on a recent announcement, there may be even more indication that future gains for GOOG hinge on the cloud. According to the Wall Street Journal, Alphabet is in talks to acquire cybersecurity startup Wiz for $23 billion.
That may sound like a hefty price tag, but a bolstering of the company’s cybersecurity business could end up providing a further boost to Google Cloud’s fiscal performance going forward.
As it stands now, the high end of sell-side estimates call for earnings to hit nearly $8 per share in 2025, and more than $10 per share by 2026.
Besides the prospect of GOOG rising in line with earnings growth, a continuation of double-digit percentage growth could also lead to further multiple expansion for shares. The potential from this is material.
Now sporting an earnings multiple in the mid-20s, a re-rating to 30 times earnings, coupled with above-average growth, may be enough to send shares towards $300 within the next two years. With this in mind, the sky’s still the limit for Alphabet stock.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) and positions in the securities mentioned in this article.
