After a recovery year in 2023, the tech sector continued its momentum in the first half of this year. Notable tech-heavy indexes such as the Nasdaq Composite And Nasdaq-100 are up 20% and 19% respectively, largely thanks to growth in big technology stocks.
Like most stocks related to artificial intelligence (AI), Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) has benefited from the rise of technology into the mainstream. Alphabet shares have risen nearly 32% this year, hitting a new record high in late June.
When stocks flirt with peaks, many investors become cautious, fearing a correction is coming. Whether that happens remains to be seen, but as a long-term investor, I’m doubling down on Alphabet, and here’s why.
Google remains the king of search engine advertising
Alphabet’s bread and butter is and will continue to be making money from Google ads. In the first quarter, Alphabet made $80.5 billion, and Google ads accounted for more than 76% of that. The good news, though, is that it’s down from previous quarters, a sign that it’s becoming less reliant on them.
Concerns about how the new AI implementation could impact Alphabet’s ad revenue are valid, but overblown. On the one hand, Google makes money when users click on links in its search ads, so if users are getting their questions answered by Google’s AI Overview answers, there could be a delay.
On the other hand, AI inclusion also opens up new advertising opportunities with new ad formats. Google Ads are so important to Alphabet’s business that you have to assume the company wouldn’t overlook the impact of implementing AI Overview.
When you typically have a 90% market share in online search, you have more room to experiment and discover ways to increase user engagement and create more targeted advertising opportunities.
Google Cloud could be a huge growth area
The cloud computing industry is growing rapidly and many expect AI developments to increase momentum. Google Cloud is still far behind the leaders Amazon Web services (31% market share) and Microsoft Azure (25% market share) in terms of customizability, but the platform has become more profitable and should contribute to growing margins.
Cloud platforms have a lot of fixed costs, such as data center operations and other infrastructure-related expenses. This means that it takes a certain amount of scale for the platforms to reach sustainable profitability. Now that Google Cloud has apparently crossed that threshold, it should get a financial boost from a segment that once squeezed its margins.
Google Cloud revenue for the first quarter was $9.6 billion, up $2.1 billion from a year ago. Operating income (profit from core operations) made a more dramatic jump, increasing more than 370% year over year. This increased efficiency helped Alphabet’s operating margin increase to 32% from 25% a year ago.
Alphabet appears to have the best value in big tech
The “Magnificent Seven” is a phrase coined to describe seven of the world’s most influential tech companies. They include Microsoft, Apple, NvidiaAmazon, Meta platforms, Teslaand Alphabet. As they go, so goes the tech sector, largely.
Alphabet appears to be the “cheapest” of the group, with a price-to-earnings (P/E) ratio of just under 28. Just because Alphabet is the cheapest of the Magnificent Seven doesn’t necessarily make it cheap, as those stocks tend to carry a premium, but Alphabet is cheaper than the average over the past decade.
This could be a great opportunity for investors to get a piece of a world-class company at a fair valuation. Alphabet has strong growth prospects, so it’s easy to justify its valuation for long-term investors. This growth won’t happen overnight, but Alphabet’s recently announced dividend should buy some patience from investors.
The quarterly dividend is $0.20, with a yield of less than 0.5%, so it’s not necessarily a must-have for income-seeking investors. Still, starting a dividend program at all should be a sign of Alphabet’s confidence in its financial health and ability to maintain profitability over the long term.
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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. Randi Zuckerberg, former chief market development officer and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Stefon Walters has positions in Apple and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. 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.
Alphabet Stock Soars to New High. Here’s Why I’m Doubling Down. was originally published by The Motley Fool
