Alphabet (NASDAQ: GOOG) stock has had a good run lately. Back in February, it was trading below $90. Today however, the stock is near $106.
After this kind of bounce, investors may be worried they’ve missed the boat. I don’t think that’s the case however. Here are three reasons I see Alphabet stock as a ‘buy’ today.
New AI features
One reason I’m bullish on Alphabet is that Google – its largest subsidiary – is shortly about to add powerful new artificial intelligence (AI) tools to its search engine.
Google has been facing increased competition from Microsoft‘s search engine Bing. Microsoft is part-owner of the AI-based chatbot ChatGPT and it has incorporated this technology into its search engine. This is credited with helping Bing exceed 100m daily active users in March.
Google is now fighting back though. It’s a major player in the artificial intelligence space, having acquired dozens of AI firms over the last decade (including the UK’s DeepMind). And it’s now going to incorporate the technology into its own search platform. This will enable the platform to interact with users in more conversational, human-like ways, and enhance the overall user experience. This should ultimately lead to higher revenues.
The opportunity space, if anything, is bigger than before.
Alphabet CEO Sundar Pichai on AI
Cost-cutting initiatives
Another reason I like the stock today is that the company is cutting costs. In January, the tech giant announced 12,000 job cuts. And the company is looking at other ways to save money.
“We are definitely being focused on creating durable savings,” CEO Sundar Pichai said recently. “We are pleased with the progress, but there is more work left to do,” he added.
Reducing the company’s cost base should lead to an explosive rise in earnings when business conditions (advertising spending) pick up. This should boost the share price.
Attractive valuation
Finally, the valuation here is attractive. Right now, Wall Street analysts expect Alphabet to generate earnings per share of $5.06 for 2023. So at today’s share price, the forward-looking price-to-earnings (P/E) ratio is about 21.
I think that’s very reasonable, given these set of positives:
- Growth prospects (it operates in a number of growth industries including digital advertising, cloud computing, and self-driving cars)
- Brand power (Google and YouTube are some of the most well-known brands in the world)
- Level of profitability (return on capital last year was 25.3%)
- Solid balance sheet (it has minimal debt)
Risks
Of course, there are also risks to consider here. One is the global economy. If economic conditions continue to deteriorate, companies may spend less on advertising. This could lead to lower revenues for Alphabet.
Another is sentiment towards tech stocks. This year, tech has been back in vogue. Things could change though, especially if interest rates keep rising.
Overall however, I see a lot of appeal in Alphabet at current levels. If I didn’t already have a large position here, I would be buying the stock today.
