Is Alphabet a Buy?

As artificial intelligence (AI) continues to drive innovation across the technology landscape, investors should consider reassessing how business models might change. Even proven industry leaders like Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), the parent company of Google and YouTube, could be at risk of losing market share if unable to adapt quickly enough.

So, let's look at Alphabet's recent performance, management's new plan to return capital to shareholders, and whether the company is poised for growth or disruption.

Alphabet is a cash-generating machine

In Alphabet's most recent period -- the first quarter of 2024 -- the company generated an impressive $80.5 billion in revenue, representing a 15% year-over-year increase.

Breaking down the company's specific segments, Google Search continued to dominate with $46.2 billion, reflecting a 14.4% year-over-year growth. Google Cloud was also a highlight, generating $9.6 billion, marking a 25.7% year-over-year growth. Notably, Google Cloud was the only division that grew compared to Q4 2023, which is typically the company's highest-revenue-producing quarter.

Alphabet's Q1 2024 total revenue translated into an operating income -- the profit from core operations -- of $25.5 billion, representing a 46.3% year-over-year improvement. The reduction of Alphabet employees undoubtedly helped the result as its total headcount dropped approximately 5.2% from 190,711 in Q1 2023 to 180,895 in Q1 2024.

Alphabet's margin expansion should continue throughout 2024 as management looks to "reengineer" its cost base. CEO Sundar Pichai added that the company is "very focused on our cost structures, procurement, and efficiency" on its most recentearnings call

Alphabet is returning capital to shareholders

Due to Alphabet's strong financial performance, the company has an immaculate balance sheet, including $96 billion in net cash. Management recently announced two initiatives to return some of this capital to shareholders.

Specifically, the company will issue its first-ever quarterly dividend of $0.20 per share to stockholders of record as of June 10, 2024. While the modest 0.46% annual yield may not appeal to dividend-seeking investors, it does leave room for future increases, considering that its payout ratio -- the percentage of that company's earnings that it pays out as dividends -- is only an estimated 12%.

Next, management recently announced that it authorized a new $70 billion share repurchasing program, which returns capital by increasing shareholders' ownership stakes. The expansion comes on the heels of management spending $61.5 billion in 2023 and $14.6 billion in Q1 2024. As a result of management's capital allocation strategy, Alphabet has reduced its outstanding share count by approximately 4% since 2023 and 11% over the past five years.

Is AI a catalyst or threat for Alphabet?

While Alphabet's financials are impressive, and shareholders are benefiting, the biggest question mark is whether AI will benefit or disrupt the company's dominance. The topic dominated the company's latestearnings call with over 40 mentions of AI in management's opening remarks. Alphabet already claims to have integrated AI into its advertising ecosystem, Google Cloud, Google Search, and YouTube, among others.

CEO Sundar Pichai underscored the recent ramp-up of AI, "I think for the first time, we can work on AI in a horizontal way, and it impacts the entire breadth of the company ... And we see a rapid pace of innovation in that underlying."

While Alphabet states it has been an AI-first company since 2016, outsiders would argue that it was beaten to market by ChatGPT, the transformative chatbot and virtual assistant developed by OpenAI and Microsoft (NASDAQ: MSFT). Notably, Alphabet axed its initial chatbot offering, Baird, and relaunched it as Gemini. According to PowerDreamer, a website tracking AI stats, ChatGPT's traffic in March 2024 was 1.7 billion compared to Gemini's traffic of 434 million.

A phone with the Google logo on it.

Image source: Getty Images.

Additionally, some data suggest that AI language models are already eroding Google's dominance in search. According to StatCounter, a web traffic analysis website, Google accounted for 90.9% of all search inquiries worldwide in April 2024, down from 92.8% in April 2023, translating to a 1.9% decline. Meanwhile, Microsoft's Bing, built by OpenAI's technology, grew from 2.76% to 3.64% during the same period.

Unfortunately for investors, Alphabet's future is largely unknown when it comes to AI. However, there is no question that it is a priority for management as it continues to pour billions into research and development (R&D), with the company spending $45.9 billion over the trailing 12 months. Notably, competitors Meta Platforms and Microsoft spent $28.2 billion and $39.1 billion on R&D, respectively, during the same period.

Looking ahead, Alphabet management believes the company has "clear paths to AI monetization through Ads and Cloud, as well as subscriptions."

GOOG Research and Development Expense (TTM) Chart

GOOG Research and Development Expense (TTM) data by YCharts

Is Alphabet a buy, sell, or hold?

Before buying any stock, it's essential to look at its valuation because even if it is a great company, overpaying can prove costly for investors. For Alphabet, the company currently trades at a price-to-earnings ratio -- a standard valuation metric for mature companies -- of approximately 26.6, which aligns with its five-year average.

While there are concerns that Google may be late to the AI party and its stock may not be a screaming buy, there's no reason to worry about the long-term outlook for the tech giant, either. Investors would be wise to hold or even add to their position and enjoy the new dividend while the company's AI story continues to unfold.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Collin Brantmeyer has positions in Alphabet and Microsoft. The Motley Fool has positions in and recommends Alphabet, Meta Platforms, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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