Alphabet stock (NASDAQ:GOOGL) has received insufficient credit for its AI possibilities.
In this section, I discuss some of Alphabet’s tragedies and successes.
And why I’m still optimistic about Alphabet stock.
The Next Generation of AI
For the time being, investors believe Alphabet is lagging behind Microsoft (NASDAQ:MSFT) as the premier AI innovator. Investors are not giving Alphabet the benefit of the doubt on that basis. This leads to a difficult issue that divides both bulls and bears.
Let us begin with the bearish consideration. The negative observation is that Alphabet has a lengthy history of being a bad innovator outside of Search.
Some instances are provided below.
- Alphabet’s (hardware) mobile product.
- Google Plus failed to compete with Meta (NASDASQ:META) as a major social networking platform.
- Android Pay did not achieve widespread adoption since the Android ecosystem is diverse, with multiple operating system versions, especially when contrasted to Apple Pay’s (NASDAQ:AAPL) success.
Alphabet, on the other hand, achieved success and ended up with a considerable market share despite arriving later than the established competitors.
- Alphabet entered the Google Cloud Platform market after Amazon Web Services (AWS) (NASDASQ:AMZN) and Microsoft Azure.
- Chrome has supplanted Internet Explorer.
- MapQuest was supplanted by Google Maps.
As a result, I don’t think it’s fair to say that Alphabet’s AI technology can’t coexist with Microsoft’s offering. The media prefers to take sides in a single ”narrative,” but the reality is that their offerings might cater to quite distinct customers.
Microsoft is more concerned with serving businesses. In contrast, Alphabet’s business model is centered on consumers. For example, with Microsoft, it may wind up being more about providing a quick answer to a query. While at Alphabet, it is possible to drive discovery.
Alphabet is currently in the midst of a perfect storm. While investors remain dubious about Alphabet’s long-term prospects, the company’s most recent quarterly earnings only showed 6% FX-adjusted revenue growth and 3% on a GAAP basis.
This bad result could not have occurred at a worse moment for investors. Not only are investors typically impatient, but there is also so much uncertainty around Alphabet.
Will Alphabet, for example, be a prominent AI player? Can Alphabet’s YouTube ever become a financially successful venture? Will Amazon’s point-of-sale advertising continue to eat into Alphabet’s market share?
I don’t claim to know the answers to these critical concerns; rather, my investment decision is based on Alphabet’s value.
Alphabet Stock Price: 25x Forward Free Cash Flows
I follow a variety of ad tech startups. And these companies all agree that the advertising industry will rebound in the second half of 2023.
Needless to say, this is only a guess. Nobody knows whether advertising will actually improve in the second half of this year. However, I’m inclined to side with advertising industry stalwarts like Meta and The Trade Desk, albeit with a healthy dosage of skepticism.
Along these lines, I anticipate Alphabet’s free cash flow might be in the $62 billion to $65 billion range. This puts the stock at about 25 times forward free cash flows.
This is definitely a fairly acceptable multiple, and it does not provide much, if any, benefit of the doubt for Alphabet’s AI potential, which might be a substantial revenue stream for Alphabet in the future.
To put it another way, I don’t believe that paying 25 times the projected free cash flow for Alphabet means that investors are being forced to pay for a “story stock.”
Conclusion
There are two major considerations.
On the one hand, Alphabet’s revenue growth rates are woefully inadequate. On the other hand, Alphabet, like the rest of Wall Street, is acutely aware that it is playing catch-up with AI.
Investors have every motive to be impatient and abandon this investment in order to pursue another “shiny object.” However, I feel that the optimum moment to invest in a stock is when it is generating high free cash flows, is experiencing investor uncertainty, and its multiple is compressed.
When the uncertainty begins to lift, Alphabet stock will soar. This could take three months or a year, but investors who stay with this company will be rewarded in the end.
Featured Image: Unsplash @ beginnerjapanese
