Alphabet stock (NASDAQ:GOOGL) (NASDAQ:GOOG) surged over 10% after its Q1 announcement, marking a substantial post-earnings rally. Despite Alphabet being already one of my largest positions, its most recent report further solidified my confidence in the stock. With the company effortlessly beating Wall Street’s estimates and posting double-digit growth across the board, shares continue to appear cheap, even after reaching new all-time highs. Consequently, I remain bullish on Alphabet stock.
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Q1 Results: Effortless Beat, Double-Digit Growth Persists
Alphabet’s Q1 numbers marked an effortless beat against Wall Street’s estimates, with the California-based tech giant posting double-digit growth across the board. Revenues soared to $80.5 billion, as you can see in the image below, topping consensus estimates by a wide margin of $1.84 billion. The 15% revenue growth also marked a significant acceleration from the previous year’s growth of 3%. Further, EPS came in at $1.89, exceeding Street estimates by a significant margin of $0.38. Let’s take a deeper look.
Search, YouTube Enjoy AI-Backed Advertising Growth Momentum
Alphabet’s impressive growth in Q1 was primarily fueled by the durable momentum of its AI-powered advertising solutions, driving revenues for both Google Search and YouTube. Consider the company’s use of AI in smart bidding, for instance. It predicts future ad conversions, enabling businesses to swiftly adapt to shifting demand dynamics.
Moreover, products like Broad Match leverage large language models to match ads to relevant searches and thus enable advertisers to respond to what millions of people are searching for. In other words, by utilizing Alphabet’s AI solutions, businesses can now find users at speed and scale and drive improving ROI, which naturally translates to growing advertising dollars for the company. Evidently, Google Search revenues grew by 14% to $46.2 billion, while YouTube Ads revenues grew by 21% to $8.1 billion.
The exciting part is that most of Alphabet’s AI solutions are only starting to roll out. We are way too early in the company’s roadmap, meaning the best is yet to come. Take P-Max, for instance, which debuted in Gemini this past February. It’s revolutionizing the creation of text and image assets, enabling businesses to promptly fulfill P-Max asset requirements.
The company claims that advertisers leveraging P-Max asset generation are 63% more likely to launch a campaign with outstanding ad strength. However, this functionality is currently exclusive to the U.S. Consequently, it’s reasonable to anticipate a prolonged surge in advertiser adoption as Alphabet progressively introduces its AI solutions worldwide.
Google Cloud Sees Margin Expansion, Boosts Profits
Google Cloud also contributed significantly to Alphebet’s revenue growth. However, it also had a notable contribution to the company’s profitability, with the division undergoing a significant margin expansion.
In particular, not only did Google Cloud revenues grow by a notable 28% to $9.6 billion, but the division’s operating margin expanded from 2.6% last year to 9.4%. It’s very encouraging to see that Q1 was Google Cloud’s fifth consecutive quarter with a positive operating profit margin.
In fact, a margin expansion in Google Cloud has taken place every quarter during this five-quarter period, notably boosting Alphebet’s overall margins and EPS growth. To illustrate, in Q1, the company’s operating margin jumped to 32%, up from 25% in the previous year, which, combined with growing revenues and share repurchases, resulted in EPS skyrocketing from 62% to $1.89.
Alphabet Stock Remains Cheap after the Earnings Rally
Following such a strong Q1 report, Alphabet shares soared to a new all-time high. Yet, I continue to find the stock quite attractively priced compared to its future growth prospects. Following an excellent start to the year, consensus estimates for Alphabet’s full-year EPS stand at $7.51, which implies a year-over-year increase of nearly 30%. Note that this comes after FY2023’s EPS growth of 27.3%. Despite such lavish growth figures, shares trade close to 22.2x this year’s projected EPS.
Even if Alphabet’s growth were to slow considerably from its current levels, the stock’s valuation still looks rather cheap, especially given Alphabet’s moat and leading position in the AI race. It’s also possible that Wall Street underestimates Alphabet’s growth growth prospects, which could imply that shares are even cheaper than they actually appear. Given the powerful combination of revenue growth and a strong margin expansion in Google Cloud, this is not a far-fetched assumption.
Is GOOGL Stock a Buy, According to Analysts?
Looking at Wall Street’s view on the stock, Alphabet features a Strong Buy consensus rating based on 31 Buys and seven Holds assigned in the past three months. At $189.79, the average Alphabet stock price prediction implies 12.9% upside potential.
If you’re unsure which analyst you should follow if you want to buy and sell GOOGL stock, the most profitable analyst covering the stock (on a one-year timeframe) is Mark Kelley from Stifel Nicolaus, featuring an average return of 32.12% per rating and a 95% success rate. Click on the image below to learn more.
The Takeaway
To sum up, Alphabet’s stellar Q1 results further strengthened my conviction in the tech giant’s prospects. With robust revenue growth driven by AI-powered advertising solutions and significant margin expansion in Google Cloud, Alphabet continues to surpass market expectations.
In fact, with the market likely still not fully pricing in the added benefit of AI to the company’s results, I believe the stock price remains at rather compelling levels despite the double-digit post-earnings rally. Hence, I will keep adding to my position at current levels.
