Alphabet Stock Is Still a Solid Buy, Even After Surging 32% This Year

Motley Fool
2024.12.15 09:27
portai
I'm PortAI, I can summarize articles.

Alphabet (GOOG, GOOGL) stock is considered a solid buy despite a 32% surge this year, with a market cap of $1.38 trillion. The company has nearly tripled its stock value over five years and reported strong financials, including significant net income and revenue growth. Key growth drivers include heavy investments in AI, strong performance in Google Cloud, and an attractive valuation with a P/E ratio of 26. Analysts expect 16% annualized earnings growth, suggesting potential for the stock to double in value over the next five years.

Investors looking for stocks that can outperform the broader market might be hesitant to invest in a company that has a market cap of $2.38 trillion, but Alphabet (GOOG -1.16%) (GOOGL -1.11%) has continued to deliver excellent returns for investors. The stock has nearly tripled in value over the last five years and already climbed 39% year to date at the time of writing.

It's a rock-solid company with $94 billion in trailing-12-month net income and $339 billion in revenue, and it's still growing these figures at double-digit rates year over year, which could pave the way for more returns.

Here are three reasons why the stock is a great buy for long-term investors.

1. Alphabet's innovation

Alphabet has been investing heavily in artificial intelligence (AI) for several years. It powers just about everything across the business, including search, advertising, content recommendations on YouTube, and cloud services.

However, its Gemini AI models have trailed other competing models for tasks like coding, solving math problems, and reasoning. Anthropic's Claude, xAI's Grok, and OpenAI's ChatGPT are generally viewed as more advanced than Gemini. This has painted the perception that Alphabet is falling behind in AI.

But Alphabet's lack of innovation may be greatly exaggerated. In a new Google blog post, the company unveiled its new quantum computing chip, Willow. Google said Willow was able to perform a standard benchmark computation that would take one of the world's most powerful supercomputers 10 septillion years to complete (one followed by 25 zeros).

The stock jumped about 5% on the news, as Willow shows there are exciting things happening at Google headquarters, even if not widely known. This is why it's worth investing in large tech companies with enormous resources to pour into new technologies. These companies generally find ways to surprise to the upside.

2. Google Cloud growth

Google Cloud is another business that probably hasn't gotten the attention it deserves on Wall Street. This is because Google Cloud has also trailed the competition from Amazon, which is currently No. 1 in the cloud market, followed by Microsoft. Google is a distant third, but it's steadily gaining share of this growing $313 billion market, according to Synergy Research.

Cloud revenue looked particularly strong in Q3, up 35% year over year. This compares to Amazon Web Services revenue growth of 19% last quarter, and Microsoft Azure's 33% increase.

As it keeps growing, Google Cloud will become more of a catalyst for Alphabet stock, since it is also starting to show strong growth in profits. Cloud operating income was 6.8% of Alphabet's total last quarter, up from just 1.2% in Q3 2023.

3. Attractive valuation

Alphabet stock recently hit a new high of $196. Technology investments, cloud services momentum, and a growing digital advertising market are placing positive sentiment around the shares.

There is uncertainty in the near term regarding the company's legal issues after it lost an antitrust case from the Department of Justice earlier this year. This may force Alphabet to divest its Chrome web browser to provide more choice to consumers over what search engine they use. But the stock's valuation seems to already account for these headwinds.

The stock's price-to-earnings (P/E) ratio is 26, which is a discount to the S&P 500. With analysts expecting the company to post 16% annualized earnings growth in the coming years, the stock still offers solid value and return prospects. Assuming it continues to grow earnings around those rates, the share price could double in value in the next five years if it's still trading at the same P/E multiple.

Considering that the S&P 500 historically returns around 10% annually, Alphabet looks like a superior investment when you take into account the billions of people who use its products every day and the enormous resources the company has to invest in new technologies and deliver above-average growth.