Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) reported Q1 earnings yesterday (24 April), and stock market investors liked what they saw. As I write, the Alphabet share price is set to open more than 5% higher later today.
Yet even after this bounce, it would still be roughly 18% lower than its peak in early February. As a result, I think this S&P 500 tech juggernaut remains undervalued and is worth considering.
Let’s dig into the numbers to see why the Google owner’s share price is set to march higher today.
Mightily impressive quarter
Since ChatGPT burst onto the scene in late 2022, investors have fretted about the implications for Google’s search business (Alphabet’s ultimate cash cow). If people started using chatbots to find stuff out (and perhaps one day shop online), then the whole business model would be under threat.
That’s because advertisers prefer to go where eyeballs are, not where they used to be (Exhibit A: the falling long-term ITV share price).
To be fair, I also worried about this risk. But we’re just not seeing any evidence of disruption from generative AI in the company’s financial results. Quite the opposite, in fact.
In Q1, year-on-year revenue jumped 12% — or 14% in constant currency — to $90.2bn. For those keeping score, that’s the equivalent of an eye-popping $1bn in revenue per day!
There was strong progress across the business, with Google Search, YouTube ads, Google subscriptions, platforms, and devices, and the cloud division each delivering double-digit growth rates. Despite some weakness in the network segment, overall ad revenue increased 8.5% to $66.9bn
Earnings per share (EPS) came in at $2.81, much higher than the $2.01 expected, as unrealised gains on a private investment (widely thought to be SpaceX) surged higher. Elon Musk’s rocket firm was valued at about $350bn at the turn of the year.
CEO Sundar Pichai commented: “AI Overviews is going very well with over 1.5 billion users per month, and we’re excited by the early positive reaction to AI Mode [chat-style AI]. There’s a lot more to come…Our differentiated, full stack approach to AI continues to be central to our growth.”
Massive buyback
The board also authorised a 5% dividend hike and an additional share buyback programme, worth up to $70bn! This will add to previous massive buybacks, and represents around 74% of Alphabet’s $95.3bn in cash and equivalents.
Looking at the valuation, buybacks make a lot of sense. Right now, the stock’s forward price-to-earnings (P/E) ratio is around 19. That’s the cheapest among the so-called Magnificent Seven group of tech stocks.
Risks
Alphabet stock doesn’t come without risk. One is a potential economic slowdown, which could hurt its core ad business.
Meanwhile, Temu and Shein, which have both invested heavily in Western marketing, are expected to spend less as duty-free shipments to the US on packages costing less than $800 are due to end next month.
Finally, there’s the risk that Google’s search empire may still be broken up by regulators. Were that to happen, it could destroy valuable synergies across advertising, data, and AI development.
Still fantastic value
Nevertheless, I believe this tech stock is significantly undervalued and is worth a closer look.
The business appears to be getting stronger, while its mind-boggling store of data gives it formidable advantages in the coming age of AI.
