In Q3, Alphabet Inc. (GOOGL) presented an excellent performance as Google Search and YouTube continued to grow. However, Google Cloud’s explosive growth caught my eye, where there was strong revenue acceleration and improvement in profit margin. That is however just one case of success, and Wall Street is not valuing Alphabet’s stock at full merits, which is a spot that clever investors can cash in on. Strong ad revenue continued to flow into the company’s core segments including Google Search and YouTube while the Google Cloud segment was the star of the show.
Google Search and YouTube Stay Strong
Google Search and YouTube demonstrated Alphabet’s leadership in digital advertising and key advertising pillars. Google Search generated 12 percent more revenue last year, thanks to more user engagement coming from new AI tools, like AI Overviews and Circle to Search. These interactive tools, where with one click you can execute more sophisticated queries, have completely reshaped how people use Google Search. Similar to AI Overviews, alone, AI Overviews have topped 1 billion users, while our Circle to Search tool, which is currently in use on 150 million Android handsets, lets users search for similar items by drawing a circle around an object in an image.
Alphabet’s management figures that one-third of users who tried the Circle to Search feature are now using it weekly, a healthy sign that it will stick around.
YouTube also saw ad revenue rise by 12 percent, thanks to both brand and direct response ads. Multiview is adding to YouTube’s appeal in living rooms, where the service is increasingly resembling a traditional TV experience. In high ad markets like the US, YouTube Shorts is fast catching up with in-stream video as 70 percent of channels posted on Shorts monthly. Stronger monetization brought by this surge in Shorts content and engagement has helped Alphabet’s ad revenue.
Google Cloud: The Real Standout
Google Cloud was the true star in YouTube stock’s Q3 results, eclipsing revenue growth beyond Search and YouTube, which rose 35 percent from a year earlier, up slightly from last quarter’s 29 percent and in line with last year’s 22 percent. Alphabet’s robust AI infrastructure with addresses such as the Gemini models, powering multimodal AI, and real-time analytics has fueled the growth of the segment. Although these tools to still too complex for everyday users, high-profile clients across many industries are adopting them.
Among the many is Hiscox, which used AI from Google Cloud to do away with days and streamline insurance quote creation time to minutes. These use cases show just how much Google Cloud can do to bring business efficiency and productivity, and therefore make Alphabet a good fit for companies that want to streamline their operations.
Google Cloud’s revenue growth may be more striking than its boost to profitability. Google Cloud’s operating income shot from $266 million a year ago to $1.9 billion this quarter, Alphabet said. The spike highlights Alphabet’s ability to drive up its cloud business, with an operating margin surge from 3.2 percent last year to 17 percent this year.
Valuation: Wall Street’s Cautious Stance
Despite YouTube stock seeing accomplishments during Q4, Wall Street has not shown undue faith in the stock’s value. Compared to the broader S&P 500 (SPX), which includes companies trading at higher multiples with slower growth, Alphabet’s stock looks cheap, trading at less than 21 times the consensus $7.99 EPS estimate for 2024. Alphabet’s forward multiple even further looking to 2025, and dips as much as 19 times expected earnings. What’s interesting is that in history, buying Alphabet at a price-to-earnings (P/E) ratio below 20 has been a pretty lucrative proposition.
Analysts had rated Alphabet a “Strong Buy” with 26 Buys and 6 Holds in the past three months, reflecting more optimism about the company’s prospects. The mean target is $207.43, or 21.1% upside for GOOGL stock. Mark Kelley at Stifel Nicolaus, who has an excellent 85% success rate and an average return per rating of 27.87% on Alphabet is also worth following for investors who want to follow the expert guidance.
Alphabet Stock Still Has Room to Grow
To summarize, YouTube stock’s core business segments continued to perform in a robust vane Q3 results, with Google Search, YouTube, and Google Cloud leading the way. The fast revenue and profitability growth, particularly in the Cloud, is a point that Google is only starting to scratch the surface. With its P/E abnormally low compared to other shares, it’s an attractive investment opportunity. GOOGL stock will continue to grow as Google Cloud forges ahead toward profitability and as Alphabet incubates improvements in its ecosystem as part of AI.
