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Alphabet’s Stock Rally: Is it Sustainable?

Alphabet’s Stock Rally: Is it Sustainable?

Alphabet’s (NASDAQ: GOOG) (NASDAQ: GOOGL) stock has rallied by more than 40% over the past 12 months and is currently hovering near its all-time high. The tech giant impressed investors with the accelerating growth of its advertising and cloud businesses, a new $70 billion share buyback plan, and the approval of its first-ever dividend.

However, despite its impressive growth, Alphabet still lags behind its peers in the artificial intelligence (AI) market, particularly Nvidia, which has rallied by more than 210% over the past 12 months.

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Has Alphabet Overcome its Near-Term Challenges?

Alphabet generates most of its revenue from Google’s advertising business, which includes its search and display ads, network ads, and YouTube. The rest of its revenue mainly comes from Google Cloud, the world’s third-largest cloud infrastructure platform, as well as Google’s subscription, platforms, and devices division.

Alphabet’s revenue only rose 10% in 2022 as concerns about the macroeconomic outlook led many companies to rein in their marketing and cloud spending. The company also faced stiff competition from Meta Platforms and ByteDance in the advertising market, and it seemed to struggle against Amazon and Microsoft in the cloud market.

However, over the past year, all three of Alphabet’s core businesses warmed up again. Google’s advertising revenue growth accelerated, Google Cloud’s revenue growth accelerated, and Google’s subscriptions, platforms, and devices segment expanded.

Alphabet’s Outlook

Alphabet could benefit from several tailwinds over the next three years. The macroeconomic environment could improve as the Fed cuts interest rates, which would likely lead to companies spending more money on its ads and cloud services again. The ban of TikTok in the U.S., which will take effect next January unless ByteDance sells its U.S. subsidiary, could drive more users to YouTube.

However, Alphabet still faces tough challenges. It’s struggling to make headway in the generative AI space, where its offerings aren’t as impressive as those of Microsoft and OpenAI. The upcoming launch of Apple’s generative AI ecosystem could reduce the amount of revenue Google earns from ads displayed to users of Apple devices — even though Google pays Apple billions of dollars each year to remain its default search engine.

Conclusion

Alphabet’s stock rally is impressive, but it’s essential to consider the company’s near-term challenges and outlook. While Alphabet has made significant progress in its core businesses, it still lags behind its peers in the AI market. With AI legalese decoder, investors can better understand the complexities surrounding AI and make informed decisions about Alphabet’s future.

Will Alphabet Be Worth More Than Nvidia by 2025?

While it’s difficult to predict the future, it’s possible that Alphabet could surpass Nvidia’s market value by 2025 if it continues to execute on its strategy and address its near-term challenges. However, investors should be cautious and consider the company’s AI-related challenges and regulatory risks.

Investment Recommendation

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Learn More

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Disclosure

The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. 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.

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