Alphabet's (NASDAQ: GOOGL) (NASDAQ: GOOG) stock has fallen 7% over the last month, fueled by a general pullback from investors in tech and a bearish view on the company's second quarter of 2024 earnings. However, the recent dip has only made its stock more attractive, with its price-to-earnings (P/E) ratio now sitting at 24.
The company's massive long-term potential makes the slight sell-off seem like an overreaction. Alphabet's core business, advertising, remains a highly lucrative venture. Meanwhile, heavy investment in artificial intelligence (AI) over the last year appears to be paying off, represented by exceptional growth from Google Cloud.
Alphabet is on a promising growth trajectory, and its stock is trading at a bargain. The company hit $61 billion in free cash flow this year, signifying vast financial resources to continue expanding its business.
So, here's why Alphabet's stock could help you become a millionaire over the long term.
Its core business is thriving
Alphabet reported its Q2 2024 earnings on July 23. Revenue increased by 14% year over year to $85 billion, beating Wall Street expectations by $450 million. Operating income jumped 26% thanks to significant gains in its ad business and Google Cloud.
The quarter was overall positive. However, after the release, Alphabet's stock began to dip in after-hours trading. The company beat on multiple fronts but missed expectations in its YouTube advertising segment. YouTube ad revenue rose 13% year over year to $8.66 billion but fell short of the forecast $8.93 billion.
However, despite the slight miss, Alphabet's ad business remains a compelling reason to invest in its stock. Google advertising accounts for 69% of the company's total revenue. The segment (which includes YouTube income) posted sales growth of 11% year over year in Q2 and boosted Google Services' operating income by an impressive 27%.
Alphabet's ad business remains a highly profitable area for the company, extending its cash reserves and ability to expand to other tech areas.
Google Cloud is paving the way for more diversified revenue streams
Critics have called Alphabet a one-note business in the past, with so much of its income owed to digital advertising. However, it's gradually changing that. Over the last year, the company has ramped up its AI expansion, adding a range of generative tools on Google Cloud.
The company spent $13 billion on capital expenditures in Q2 2024, a 91% rise from the $7 billion it spent in the year-ago quarter, as it has broadened its AI capabilities. CEO Sundar Pichai said in a recent conference call its AI initiatives are already "driving new growth."
Pichai explained, "Year-to-date, our [AI] infrastructure and generative [AI] solutions for cloud customers have already generated billions in revenues and are being used by more than two million developers."
Google Cloud growth reflected some of the company's success in AI, with revenue and operating income soaring 29% and 196% from the previous year. Google Cloud holds the third-largest market share in cloud computing after Amazon Web Services and Microsoft's Azure. However, Alphabet is quickly catching its rivals, outperforming both platforms in cloud growth last quarter.
Google Cloud is on a path to becoming a larger and larger part of Alphabet's business, diversifying earnings and making the company home to two highly lucrative divisions.
Wall Street's bearish reaction to Alphabet's latest quarter boosted the value of its stock
A recent dip brought Alphabet's P/E ratio down to an attractive 24. For reference, the same metric for Microsoft and Amazon is significantly higher at 37 and 51, respectively.
P/E is a useful valuation metric calculated by dividing a company's stock price by its earnings per share. It can be an excellent tool when determining whether a stock is trading at a value or is too expensive. Generally, the lower the P/E, the bigger the bargain.
Data by YCharts,
However, the P/E alone doesn't always tell the whole story. In addition to lower figures than its main rivals, Alphabet's current P/E is below its 10-year average for the metric, making 2024 one of the best times to buy.
Alphabet has a reputation for delivering significant growth, with its shares up some 490% over the last decade. The company has made many millionaires in its time. However, it likely isn't done yet. The emergence of AI could see it outperform its stock growth over the next 10 years, giving you the opportunity to become a millionaire with the right investment.
Should you invest $1,000 in Alphabet right now?
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Dani Cook has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, 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.
