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GOOGL Gains 18% YTD: Can Generative AI Focus Drive the Stock?
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Alphabet Inc. (GOOGL - Free Report) shares have gained 17.9% in the year-to-date period, outpacing the Zacks Internet-Services industry’s growth of 16.6%. The GOOGL stock’s return is above the S&P 500’s rise of 17.8% but below the broader technology sector’s rally of 21.3% in the same time frame.
Alphabet is significantly benefiting from its growing Generative AI (GenAI) capabilities, which are driving its momentum in the booming cloud computing market and the search engine space by enhancing search results.
The company is riding on its most advanced and powerful large language model (LLM), namely Gemini. It is making concerted efforts to deliver the GenAI experience across its products and services with the integration of Gemini.
GOOGL is experiencing strong contributions from its AI investments. As of June 2024, more than 1.5 million developers are using Gemini.
However, increasing investment expenses, litigation issues associated with its AI technology, market uncertainties and rising competition in the GenAI space are concerning for GOOGL.
GOOGL Stock Beats Industry YTD
Image Source: Zacks Investment Research
Given the combination of risks and rewards, the question arising in investors' minds is whether the stock can improve from the current level or has reached the top. To answer this, let us delve deeper into the fundamental aspects of the company.
Alphabet Google’s Gemini comes in four sizes, forming a versatile model family that runs efficiently on everything, from data centers to devices. Each model of this family is designed for various use cases. With Gemini, Google offers the longest context window of any large-scale foundation model to date.
The company is also gaining traction among various enterprises with its enterprise-focused AI code completion and assistance tool, Gemini Code Assist.
GOOGL recently introduced a Gemini-powered summarize feature in Gmail for Android. This GenAI-backed feature is useful in summarizing long newsletters in Gmail. Users can recap conversations in Gmail with the “Summarize this email” option.
The introduction of Gemma 2, which is a lightweight open model available in 9B and 27B parameter sizes, aiming to accelerate AI deployment and innovations across various enterprises, is noteworthy.
The launch of the expanding global footprint of its GenAI-powered note-taking app, NotebookLM, is another positive. It is available in the United States, Australia, Brazil, Canada, India, the U.K., and 208 more countries and territories.
Solid momentum in Google’s Vertex AI, which enables developers to train, tune, augment and deploy applications using generative AI models, is a plus. Google added Anthropic’s newly released model, called Claude 3.5 Sonnet, to Vertex AI.
Alphabet offers an advanced image generation model, namely Imagen 3, in preview for Vertex AI customers with early access.
The integration of the GenAI technology into the search engine to drive the company’s search momentum is noteworthy. LLMs, coupled with multi-search and visual exploration features, are continuously improving search results.
The Search Generative Experience (“SGE”), which leverages GenAI technology to make search results more natural and intuitive, is boosting the search traffic on the company’s search platform.
Coming to the advertisement business, Alphabet’s growing efforts to deliver better performance and profitability to advertisers on the back of foundational research models and LLMs are positive.
SGE is significantly benefiting the advertisement business as it can create relevant, customized and high-quality ads. The strength in the conversational experience of Google Ads and Performance Max is driving the company’s momentum among advertisers.
Rising Estimates Reflect Upside Potential in GOOGL Stock
Alphabet’s long-term prospects are expected to benefit from its growing GenAI innovations and product integrations. The company’s strong efforts to strengthen Google Cloud, Search and YouTube with its GenAI capabilities will drive its top-line growth in the long run and allow it to enjoy economies of scale. Investors are optimistic about this fact which is reflected in the upward revision of earnings estimates.
The Zacks Consensus Estimate for 2024 revenues is pegged at $296.53 billion, which indicates year-over-year growth of 15.6%.
The same for 2024 earnings stands at $7.63 per share, which implies year-over-year growth of 31.6%. The EPS estimate has moved north by a penny over the past 30 days.
Image Source: Zacks Investment Research
GOOGL Stock Overvalued
However, the GOOGL stock is not so cheap, as the Value Style Score of C suggests a stretched valuation at this moment.
Alphabet is currently trading at a premium with a forward 12-month Price/Sales of 6.36X compared with the industry’s 5.36X, which suggests that investors should wait for a better entry point.
Image Source: Zacks Investment Research
GOOGL Trading Below Key Moving Average
Adding to investors’ concerns, Alphabet shares have dipped below their 50-day moving average, a technical indicator often seen as a bearish signal. This movement suggests that the short-term prospects of GOOGL are somewhat foggy.
Image Source: Zacks Investment Research
Intensifying Competition Poses Risks
Alphabet faces significant competition in the booming GenAI market from the likes of Microsoft (MSFT - Free Report) and Amazon (AMZN - Free Report) , which are leaving no stone unturned to boost their GenAI-powered offerings.
Microsoft continues to make strong efforts to boost its generative AI capabilities. Its integration of GPT-4 into its search engine Bing and browser Edge to deliver a ChatGPT-like experience to users is noteworthy. Growing momentum across Azure OpenAI and Copilots has turned out to be a game changer.
Meanwhile, Amazon is riding on Amazon Bedrock, which has provided it with a breakthrough in the generative AI space. Amazon Bedrock offers seamless access to high-performing foundation models from AI companies through an API.
Conclusion
Alphabet’s AI push is hard to ignore. Its long-term growth story and upward estimate revision are compelling.
However, macroeconomic headwinds, intensifying competition, lofty valuation and mounting expenses suggest that now may not be the ideal time to buy GOOGL stock aggressively.
For current shareholders, holding on to the stock seems prudent, as the company’s fundamental strengths and growth drivers are intact. However, new investors should consider waiting for a more attractive entry point.
Image: Bigstock
GOOGL Gains 18% YTD: Can Generative AI Focus Drive the Stock?
Alphabet Inc. (GOOGL - Free Report) shares have gained 17.9% in the year-to-date period, outpacing the Zacks Internet-Services industry’s growth of 16.6%. The GOOGL stock’s return is above the S&P 500’s rise of 17.8% but below the broader technology sector’s rally of 21.3% in the same time frame.
Alphabet is significantly benefiting from its growing Generative AI (GenAI) capabilities, which are driving its momentum in the booming cloud computing market and the search engine space by enhancing search results.
The company is riding on its most advanced and powerful large language model (LLM), namely Gemini. It is making concerted efforts to deliver the GenAI experience across its products and services with the integration of Gemini.
GOOGL is experiencing strong contributions from its AI investments. As of June 2024, more than 1.5 million developers are using Gemini.
However, increasing investment expenses, litigation issues associated with its AI technology, market uncertainties and rising competition in the GenAI space are concerning for GOOGL.
GOOGL Stock Beats Industry YTD
Image Source: Zacks Investment Research
Given the combination of risks and rewards, the question arising in investors' minds is whether the stock can improve from the current level or has reached the top. To answer this, let us delve deeper into the fundamental aspects of the company.
GenAI Innovations & Integrations Boost GOOGL’s Prospects
Alphabet Google’s Gemini comes in four sizes, forming a versatile model family that runs efficiently on everything, from data centers to devices. Each model of this family is designed for various use cases. With Gemini, Google offers the longest context window of any large-scale foundation model to date.
The company is also gaining traction among various enterprises with its enterprise-focused AI code completion and assistance tool, Gemini Code Assist.
GOOGL recently introduced a Gemini-powered summarize feature in Gmail for Android. This GenAI-backed feature is useful in summarizing long newsletters in Gmail. Users can recap conversations in Gmail with the “Summarize this email” option.
The introduction of Gemma 2, which is a lightweight open model available in 9B and 27B parameter sizes, aiming to accelerate AI deployment and innovations across various enterprises, is noteworthy.
The launch of the expanding global footprint of its GenAI-powered note-taking app, NotebookLM, is another positive. It is available in the United States, Australia, Brazil, Canada, India, the U.K., and 208 more countries and territories.
Solid momentum in Google’s Vertex AI, which enables developers to train, tune, augment and deploy applications using generative AI models, is a plus. Google added Anthropic’s newly released model, called Claude 3.5 Sonnet, to Vertex AI.
Alphabet offers an advanced image generation model, namely Imagen 3, in preview for Vertex AI customers with early access.
The integration of the GenAI technology into the search engine to drive the company’s search momentum is noteworthy. LLMs, coupled with multi-search and visual exploration features, are continuously improving search results.
The Search Generative Experience (“SGE”), which leverages GenAI technology to make search results more natural and intuitive, is boosting the search traffic on the company’s search platform.
Coming to the advertisement business, Alphabet’s growing efforts to deliver better performance and profitability to advertisers on the back of foundational research models and LLMs are positive.
SGE is significantly benefiting the advertisement business as it can create relevant, customized and high-quality ads. The strength in the conversational experience of Google Ads and Performance Max is driving the company’s momentum among advertisers.
Rising Estimates Reflect Upside Potential in GOOGL Stock
Alphabet’s long-term prospects are expected to benefit from its growing GenAI innovations and product integrations. The company’s strong efforts to strengthen Google Cloud, Search and YouTube with its GenAI capabilities will drive its top-line growth in the long run and allow it to enjoy economies of scale. Investors are optimistic about this fact which is reflected in the upward revision of earnings estimates.
The Zacks Consensus Estimate for 2024 revenues is pegged at $296.53 billion, which indicates year-over-year growth of 15.6%.
The same for 2024 earnings stands at $7.63 per share, which implies year-over-year growth of 31.6%. The EPS estimate has moved north by a penny over the past 30 days.
Image Source: Zacks Investment Research
GOOGL Stock Overvalued
However, the GOOGL stock is not so cheap, as the Value Style Score of C suggests a stretched valuation at this moment.
Alphabet is currently trading at a premium with a forward 12-month Price/Sales of 6.36X compared with the industry’s 5.36X, which suggests that investors should wait for a better entry point.
Image Source: Zacks Investment Research
GOOGL Trading Below Key Moving Average
Adding to investors’ concerns, Alphabet shares have dipped below their 50-day moving average, a technical indicator often seen as a bearish signal. This movement suggests that the short-term prospects of GOOGL are somewhat foggy.
Image Source: Zacks Investment Research
Intensifying Competition Poses Risks
Alphabet faces significant competition in the booming GenAI market from the likes of Microsoft (MSFT - Free Report) and Amazon (AMZN - Free Report) , which are leaving no stone unturned to boost their GenAI-powered offerings.
Microsoft continues to make strong efforts to boost its generative AI capabilities. Its integration of GPT-4 into its search engine Bing and browser Edge to deliver a ChatGPT-like experience to users is noteworthy. Growing momentum across Azure OpenAI and Copilots has turned out to be a game changer.
Meanwhile, Amazon is riding on Amazon Bedrock, which has provided it with a breakthrough in the generative AI space. Amazon Bedrock offers seamless access to high-performing foundation models from AI companies through an API.
Conclusion
Alphabet’s AI push is hard to ignore. Its long-term growth story and upward estimate revision are compelling.
However, macroeconomic headwinds, intensifying competition, lofty valuation and mounting expenses suggest that now may not be the ideal time to buy GOOGL stock aggressively.
For current shareholders, holding on to the stock seems prudent, as the company’s fundamental strengths and growth drivers are intact. However, new investors should consider waiting for a more attractive entry point.
Currently, Alphabet carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.