Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) had a slow start to the year as AI blunders blinded investors from high growth in the company’s search and cloud segments. However, the stock is back in the spotlight and thriving after a dominant earnings report. Revenue acceleration, rising profit margins, and a recently announced dividend strengthen the stock’s bullish thesis and make it look attractive for the long term.
Alphabet’s Revenue Growth Accelerated
Alphabet reported 15% year-over-year revenue growth in Q1 2024. That growth rate helped the corporation generate $80.5 billion in total revenue. It’s a good improvement from Q4-2023’s 13.5% growth rate. Additionally, Alphabet only achieved 3% year-over-year revenue growth in Q1 2023.
Google Cloud revenue also accelerated in the quarter and is becoming a larger component of the company’s total business. The cloud computing segment brought in revenue of $9.57 billion, which is a 28.4% year-over-year increase. Google Cloud also brought in $900 million in operating income compared to $191 million in the same period last year. That’s a 371% year-over-year increase.
Google Cloud revenue has been growing faster than Amazon Web Services revenue, and a higher growth rate indicates that Alphabet can be gaining market share in the highly lucrative cloud computing industry. Overall, cloud computing is expected to achieve a compound annual growth rate of 16.4% beyond 2029.
Profit Margins Soared Again
The success of Google Cloud was a highlight, but it reflects the corporation’s focus on higher profit margins. Overall net income reached $23.66 billion, which is 57.2% higher than Q1 2023. Higher profit margins will make the valuation more attractive, especially for investors who look at the forward P/E ratio.
Alphabet stock was only up by 51% over the past year, excluding the after-hours earnings surge. That’s a little less than the company’s net income growth rate, which indicates a healthy valuation. Shares currently trade at a 29x P/E ratio.
The tech conglomerate is taking a leaner approach and has been initiating several cost-cutting measures. Employee headcount is down from 190,711 to 180,895, which is a 5.4% year-over-year decrease. Firings have become more normal for the tech giant as it aims to improve margins.
Alphabet Is Following the Meta Platforms Playbook
Alphabet reported an exceptional quarter with rising revenue and profit margins. Meta Platforms (NASDAQ:META) enjoyed the same success in 2023, which prompted the stock price to more than double over the past year.
The search engine and cloud computing giant even instated its own dividend, just as Meta did one quarter ago. Shareholders will receive a quarterly dividend of $0.20 per share on June 17, 2024. Class A, Class B, and Class C shares are all eligible for the dividend, and it can grow considerably over the years.
Alphabet has a healthy $110.9 billion in cash, cash equivalents, and marketable securities that can support dividend hikes. The company also authorized an additional $70.0 billion stock buyback program to reward long-term investors. Meta Platforms performed well with this playbook, and it seems like Alphabet is ready to get started.
What’s Next for Alphabet?
Alphabet will have multiple opportunities to expand its profit margin. The corporation faces generous comps for Q2 2024. The firm’s profit margins are in the 20%-25% range, and I believe they are likely to reach 30% within a few quarters.
Remarks from CEO Sundar Pichai indicate that artificial intelligence is going to play a big role in the corporation’s future quarters. Investors likely knew this already, but hearing it from Pichai himself adds more confirmation.
“We are well under way with our Gemini era and there’s great momentum across the company. Our leadership in AI research and infrastructure, and our global product footprint, position us well for the next wave of AI innovation,” Pichai stated in the press release.
Is GOOGL Stock a Buy, According to Analysts?
GOOGL stock has a Strong Buy rating based on 30 Buys and seven Holds assigned in the past three months. Before earnings, the average GOOGL stock price target of $167.51 implied 7.4% upside potential. Now, analysts are likely raising their price targets in response to the company’s impressive results.
The Bottom Line on Alphabet Stock
Alphabet delivered a good earnings report for its investors. Revenue growth continues to accelerate, while artificial intelligence has the potential to deliver meaningful growth in the long run.
While Gemini AI can deliver enticing returns, the company is not solely reliant on AI’s full realization. Search and Google Cloud segments continue to perform well. Google Cloud, in particular, delivered impressive growth and now makes up 11.9% of total revenue and 3.5% of total operating income, as its operating income soared by 371% year-over-year. Rising operating income in this segment should have a meaningful impact on overall profits.
The stock has been long overlooked among the Magnificent Seven stocks. However, these results and the market’s reaction should put Alphabet stock back on the map. Alphabet looks like a solid long-term pick and now offers cash flow for long-term investors.
