Alphabet Stock Looks Like an Absolute Bargain for 2024

Alphabet Inc. (NASDAQ: GOOG) (NASDAQ: GOOGL) operates several major technology businesses, including Google Search, YouTube, Android, and Google Cloud. But advertising still makes up the vast majority of Alphabet’s revenues and profits.

This advertising dependence hurt the company in late 2022 and early 2023 amid a broader economic slowdown. However, with easier year-over-year comparisons ahead, Alphabet looks poised for a rebound in 2024.

Advertising Pullback Weighs on Recent Results

In the third quarter of 2023, Alphabet reported total revenues of $76.7 billion, up 11% year-over-year. Advertising revenues comprised $54.5 billion of the total, rising just 9% versus the prior year. Lower advertiser spending across search, YouTube, and the Google Network weighed on growth.

Many companies reduced ad budgets in anticipation of a potential recession. This cautious stance toward advertising spending carried over from the second quarter, when advertising revenues grew by only 12%.

Bottom Likely In as Comparisons Get Easier

The advertising slowdown hit Alphabet’s results hard given the company’s reliance on ads. But the worst is likely over. Though ad spending remains weak, Alphabet faces easier year-over-year comparables going forward.

In the fourth quarter of 2021, Google advertising revenues jumped 33%. Comparing to these high growth rates made Alphabet’s 2022 performance look weak. However, the growth trajectory should start looking better as the company laps last year’s surge.

Any stabilization or rebound in ad spending will also show up clearly versus last year’s figures. With analysts projecting a return to 15%+ advertising revenue growth in 2023, expectations are mounting for a comeback.

Strategic Cost Reductions Boost Margins

Alphabet took steps to protect profitability amid the advertising slump. The company enacted selective hiring freezes for the remainder of 2022. Layoffs also impacted teams across the organization.

These measures aimed to cut costs and streamline operations. In the third quarter, total expenses as a percentage of revenues declined from 31% to 29%. This helped grow operating income by 19% to $21.1 billion, even on modest 11% sales growth.

Operating margin jumped 3% points to 30%. This margin expansion showcases Alphabet’s ability to calibrate spending when needed. With profitability improving, earnings per share surged 46% higher despite the advertising challenges.

Growth Levers Beyond Advertising

While advertising drives the majority of Alphabet’s revenues today, the company has several growth levers beyond ads. Google Cloud is now a $23 billion business, putting it firmly among the top cloud infrastructure providers.

Cloud represented 8% of Alphabet’s total Q3 revenues. With the market growing at over 15% per year, Google Cloud should continue gaining share. Its revenue growth did slow to 37% in the quarter amid macro uncertainty. But the long-term trend remains positive.

Meanwhile, Waymo’s autonomous vehicle technology and Verily’s life sciences initiatives target massive addressable markets. Their contributions are small today but could become substantial in the coming years.

Valuation Looks Highly Compelling

Alphabet currently trades right around $95 per share, giving it a market cap of $1.2 trillion. With full-year 2022 revenues expected to rise 10% to 11% to around $282 billion, the stock trades at just over 4x sales.

For 2023, analysts forecast revenue growth rebounding to 16% aided by the easier advertising comparisons. That would produce roughly $327 billion in revenues.

Based on that projection, Alphabet stock trades at just 3.7x 2023 sales. This seems like an incredibly low multiple for a dominant, fast-growing tech leader.

Looking at profits, Alphabet earned $4.32 per share in the first nine months of 2023. That extrapolates to around $5.70 in full-year EPS. For 2024, projections call for EPS recovering to around $6.50.

Trading at $95, Alphabet stock goes for only 16.7 times current year earnings. That drops to 14.6x on the 2023 outlook. Again, these multiples look very cheap for a company of Alphabet’s caliber.

The valuation picture becomes even more compelling when looking further ahead. Based on 2024 earnings estimates of $7.40 per share, the stock trades at just 12.8x forward earnings.

For a dominant technology company with AI, cloud, and other futuristic innovations, this appears like an incredible bargain. Alphabet deserves a premium, not a discount, especially considering the growth reacceleration on the horizon.

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Investment Verdict: Strong Buy Before Rebound

Alphabet dealt with the economic reality of a pullback in digital ad spending over the past few quarters. Weakness in this key business area weighed on financial results. But with the advertising hangover wearing off, Alphabet seems poised for a rebound in 2023 and especially 2024.

Easier year-over-year comparables will make revenue and earnings growth look stellar again soon. Profitability should also keep increasing as Alphabet benefits from strategic cost reductions made in 2022.

Trading at just 12-13x 2024 earnings estimates, the stock looks extremely cheap relative to Alphabet’s strong competitive position and promising long-term growth outlook.

For investors with at least a 12-24 month time horizon, Alphabet stock appears like an absolute bargain worth buying aggressively before the next upswing.

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