Tech conglomerate Alphabet’s (GOOGL) first-quarter revenue and earnings beat analyst expectations, driven by solid momentum in its Cloud business. Furthermore, the company is making significant product breakthroughs with AI technology. So, should you buy, hold, or sell this tech stock for July? Read on to find out…

Google-parent Alphabet Inc. (GOOGL) is one of the world’s most valuable companies. While the search engine is GOOGL’s flagship product, the company operates in various areas, including hardware, cloud computing, advertising, and software. Moreover, its recent technological advancements in the field of AI are attracting significant investor attention.

The stock is currently trading above its 50-day and 200-day moving averages of $117.34 and $101.87, respectively, indicating an uptrend. Considering GOOGL’s solid fundamentals and upward trajectory, it could be wise to buy this stock now.

With a $1.53 trillion market cap, GOOGL is a technology conglomerate holding company that became the parent company of Google and several former Google subsidiaries on October 2, 2015. The company operates through Google Services; Google Cloud; and Other Bets segments.

The tech company reported fiscal 2023 first-quarter results, exceeding analysts’ estimates. GOOGL’s revenue of $69.78 billion topped analyst expectations of $68.90 billion, according to Refinitiv. Also, the company reported earnings of $1.17 per share, compared to $1.07 per share expected, according to Refinitiv.

Moreover, GOOGL’s YouTube ad revenue was $6.69 billion versus $6.60 billion expected, according to StreetAccount. The beat on the top and bottom lines breaks a string of four consecutive quarters in which the company missed the consensus estimates.

Sundar Pichai, CEO of GOOGL, said, “We are pleased with our business performance in the first quarter, with Search performing well and momentum in Cloud. We introduced important product updates anchored in deep computer science and AI. Our North Star is providing the most helpful answers for our users, and we see huge opportunities ahead, continuing our long track record of innovation.”

Following the pressure from the vast popularity of AI-based chatbot ChatGPT, launched in November last year by rival Microsoft Corp. (MSFT)-backed Open AI, GOOGL launched its own AI chatbot called Bard during the first quarter.

In February, Alphabet’s Google invested about $300 million in AI start-up Anthropic. Anthropic seeks to make developments in generative AI, sophisticated computer programs capable of writing scripts and creating art in seconds. The agreement involves Google taking a stake of approximately 10% in the start-up.

Shares of GOOGL have gained 34.5% over the past six months and 35.9% year-to-date to close the last trading session at $119.90. Also, the stock has gained 21.6% over the past nine months.

Here are the factors that could affect GOOGL’s performance in the near term:

Positive Recent Developments

On June 8, GOOGL introduced the Secure AI Framework (SAIF), a conceptual framework for secure AI systems. SAIF is designed to help mitigate risks specific to AI systems, such as stealing the model, data positioning of training data, extracting confidential information in the training data, and injecting malicious inputs.

On May 25, GOOGL announced Search Labs, a new generative AI-powered program that enables users to access early experiments like SGE, Code Tips, and Add to Sheets. In the same month, the company unveiled the private preview of Duet AI for Google Cloud, an always-on AI collaborator to provide help to developers.

Such generative AI-powered products are expected to boost the company’s growth and revenue streams.

Robust Financials

For the first quarter that ended March 31, 2023, GOOGL’s total revenues increased 2.6% year-over-year to $69.79 billion. Its Google Search & Other revenue grew marginally year-over-year to $40.36 billion, while its Google Cloud revenue rose 28.1% from the year-ago value to $7.45 billion. The company’s operating income was $20.09 billion, up 15.4% year-over-year.

In addition, the company’s net income grew 9.2% from the prior-year period to $16.44 billion, while its EPS came in at $1.23, an increase of 5.1% year-over-year.

Solid Historical Growth

GOOGL’s revenue grew at a 19.5% CAGR over the past three years, while its EBITDA and EBIT rose at CAGRs of 21.9% and 25.9%, respectively. Over the same time frame, the company’s net income and EPS increased at CAGRs of 19.3% and 22%, respectively. Also, its total assets grew at a CAGR of 10.6% over the same period, and its levered free cash flow increased at a 36.6% CAGR.

Favorable Analyst Estimates

Analysts expect GOOGL’s revenue for the third quarter (ending September 2023) to come in at $74.04 billion, indicating an increase of 7.2% year-over-year. The consensus EPS estimate of $1.33 for the current quarter reflects a 25.5% year-over-year improvement. Moreover, the company has topped the consensus revenue estimates in three of the trailing four quarters.

Furthermore, analysts expect GOOGL’s revenue and EPS for the fiscal year (ending December 2023) to increase 5.9% and 17.2% from the previous year to $299.59 billion and $5.35, respectively. For the fiscal year 2024, the company’s revenue and EPS are expected to grow 11.3% and 17.8% year-over-year to $333.56 billion and $6.30, respectively.

High Profitability

GOOGL’s trailing-12-month net income margin of 20.58% is 632.3% higher than the 2.81% industry average. The stock’s trailing-12-month gross profit margin and EBIT margin of 55.30% and 25.35% are 11.5% and 196.4% higher than the industry averages of 49.6% and 8.6%, respectively.

Furthermore, the stock’s 19.63% trailing-12-month levered FCF margin is 167.1% higher than the industry average of 7.35%. Its trailing-12-month ROCE, ROTC, and ROTA of 22.76%, 15.74%, and 15.86% are higher than the industry averages of 3.29%, 3.83%, and 1.48%.

POWR Ratings Reflect Promise

GOOGL has an overall rating of B, which translates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. GOOGL has a B grade for Quality, consistent with its higher-than-industry profitability.

GOOGL is ranked #10 in the 57-stock Internet industry.

Beyond what I have stated above, we have also given GOOGL grades for Growth, Value, Momentum, Sentiment, and Stability. Get access to all the GOOGL Ratings here.

Bottom Line

With a diverse portfolio of innovative products and services, tech giant GOOGL is well-positioned to witness significant growth in the near term. Moreover, the company is making several advancements in AI technology, incorporating it into its products to improve user experiences and enhance efficiency and productivity for developers and enterprise customers.

Given its strong financials, high profitability, and bright growth outlook, GOOGL could be an ideal investment this month.

How Does Alphabet Inc. (GOOGL) Stack Up Against Its Peers?

While GOOGL has an overall POWR Rating of B, investors could also check out these other stocks within Internet industry with A (Strong Buy) or B (Buy) ratings: Expedia Group Inc. (EXPE), Opera Limited (OPRA), Yelp Inc. (YELP).

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GOOGL shares were unchanged in premarket trading Tuesday. Year-to-date, GOOGL has gained 35.89%, versus a 16.92% rise in the benchmark S&P 500 index during the same period.

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About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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