Alphabet GOOGL has experienced a 21.4% jump in its stock price year to date, outperforming the Zacks Internet – Services industry, the Zacks Computer and Technology sector and the S&P 500 index’s returns of 15.8%, 18.3% and 14.6%, respectively.
This impressive performance can be largely attributed to the company's strong positioning in the cloud computing area. Alphabet division Google’s growing investments in infrastructure, security, data management, analytics and especially generative AI have been major positives.
In second-quarter 2024, the Google Cloud segment, which derives revenues from fees collected for Google Cloud Platform services and Google Workspace collaboration tools, generated revenues of $10.35 billion (12.2% of the total revenues), up 28.8% year over year.
Beside these, Alphabet, known as the search giant, is constantly benefiting from solid search momentum, the growing popularity of Android and strength in YouTube.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
Generative AI Strength: Key Catalyst
Alphabet is riding on solid momentum in Google Cloud, which is enjoying growing customer momentum due to generative AI strength.
Google is cashing in on the increasing demand for Large Language Models with its most powerful AI model called Gemini.
The company offers an enterprise-focused AI code completion and assistance tool, Gemini Code Assist, which is driving its momentum among various enterprises.
Solid momentum in Google’s Vertex AI, which enables developers to train, tune, augment and deploy applications using generative AI models, is another positive. Google also added Anthropic’s newly released model, called Claude 3.5 Sonnet, to Vertex AI. The launch of the latest image generation model, namely Imagen 3, in preview for Vertex AI customers with early access, is a plus.
Google’s introduction of various open-source tools to support generative AI projects and infrastructure is a plus.
The company recently made Gemma 2, which belongs to its family of lightweight, state-of-the-art open models called Gemma, available to researchers and developers across the globe in both 9 billion (9B) and 27 billion (27B) parameter sizes.
Google’s unveiling of LearnLM, a family of generative AI models designed for conversational tutoring on various subjects, is noteworthy.
Strong Customer Base Drives Growth
Strengthening generative AI capabilities, along with Google Cloud’s other robust cloud solutions, expanding data center network, and an increasing number of infrastructure regions, are constantly bolstering its customer base.
Recently, Workday WDAY extended its partnership with Google Cloud to accelerate the integration of generative AI technology into its platform. Workday plans to leverage Google’s Gemini models and Vertex AI in order to aid in quick AI-powered code generation, troubleshooting and information retrieval.
Cintas partnered with Google Cloud to develop a generative AI-powered knowledge center to accelerate its digital transformation. Cintas is leveraging Google Cloud’s Vertex AI in order to build its gen AI-backed search engines to empower employees.
Victoria's Secret & Co. is in a multi-year strategic partnership with Google Cloud to enhance online shopping experiences globally and improve operational efficiency. Victoria’s Secret is utilizing Google Cloud’s AI and generative AI technologies to develop a novel conversational assistant that will provide personalized product recommendations. Powered by Vertex AI, the chatbot intends to deliver individualized advice based on unique preferences and experiences.
An expanding customer base is expected to aid the performance of Google Cloud in the days ahead.
For 2024, the Zacks Consensus Estimate for Google Cloud revenues is pegged at $41.93 billion, indicating year-over-year growth of 26.7%.
The growing prospects of Google Cloud place Alphabet well in the highly competitive cloud market.
In the global cloud infrastructure market, Google Cloud has solidified its position as the third-largest provider, reaching a record 10% market share in the first quarter of 2024, per Synergy Research Group. This narrows the gap with market leader Amazon’s AMZN AWS and the second-largest player Microsoft’s MSFT Azure, which accounted for 31% and 25% of the market, respectively. The "Big Three" control around 67% of the expanding cloud industry.
Conclusion
In this data-driven world, wherein cloud has become mainstream for most businesses, Alphabet’s solid Google Cloud momentum due to compelling cloud solutions, expanding customer base and growing generative AI capabilities are expected to benefit its near and long-term prospects.
The consensus mark for third-quarter 2024 revenues is pegged at $72.73 billion, suggesting year-over-year growth of 13.6%. The same for third-quarter earnings stands at $1.83 per share, indicating a rise of 18.1% from the year-ago reported figure. The EPS estimate has been revised upward by 0.5% in the past seven days.
The Zacks Consensus Estimate for 2024 revenues is pegged at $296.37 billion, which indicates year-over-year growth of 15.5%. The same for 2024 earnings stands at $7.62 per share, which implies year-over-year growth of 31.4%. The EPS estimate has moved north by 0.3% over the past 30 days. However, it moved down by a penny in the past seven days.
Image Source: Zacks Investment Research
Although Alphabet is known as the third-largest global cloud player, it faces stiff competition from Amazon and Microsoft, which poses significant risks. The company also keeps grappling with severe litigation issues across various regions, which do not bode well.
Moreover, Alphabet is currently trading at a premium with a forward 12-month P/S of 6.63X compared with the industry’s 5.53X, reflecting a stretched valuation.
Image Source: Zacks Investment Research
In conclusion, investors should wait for a better entry point for Alphabet, which currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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