Transitioning from the tech rally of 2023, the market tone has shifted in 2024. The once-universal ascent of stock prices has now evolved into a nuanced landscape. Among the “Magnificent 7”, we witness a scenario where stalwarts like Apple (AAPL), Alphabet (GOOG), and Tesla (TSLA) have faltered this year. On the contrary, Nvidia (NVDA) – the shining beacon of the S&P 500 Index in 2023 – has surged ahead once more, possibly on route to becoming the pinnacle of U.S. companies.
Alphabet, the parent company of Google, finds itself in tumultuous waters. For over a decade, the stock has underperformed within the elite Magnificent 7 group. Valuation metrics have contracted in recent years, positioning GOOG with a modest next 12-months (NTM) price-to-earnings (PE) multiple of 19.4x. These multiples currently linger beneath those of its Magnificent 7 counterparts and even fall short of the broader S&P 500.
Traditionally, GOOG shares have commanded a premium above the S&P 500 and tech rivals such as Meta Platforms (META) and Apple. However, the narrative has shifted as of late. The 2030 forecast for Alphabet stock is now shrouded in uncertainty, spotlighting critical factors that may steer the company’s long-term trajectory.
Google’s Search Dominance
Google’s supremacy in the search arena has been undisputed, yet cracks have appeared in its armor within the digital ad sphere. In 2022, the collaborative market share of Meta Platforms and Alphabet in the U.S. digital ad landscape dwindled to 48.4%, marking a shift below the 50% threshold for the first time since 2014.
The drift of digital ad expenditure toward platforms like TikTok has posed a challenge, alongside the budding prowess of Amazon (AMZN) in digital advertising. Amazon’s earnings of $14.6 billion from digital ads in Q4 2023, up by 27% YoY, underlines the intensified competition. Furthermore, the emergence of ad-backed tiers by streaming giants like Amazon Prime, Netflix (NFLX), and Disney (DIS) has compounded the competitive landscape.
Alphabet’s Struggle in the Generative AI Arena
Compounding Alphabet’s woes is its apparent lag in the generative AI sector. Despite rebranding its Bard chatbot as Gemini, the new iteration has been embroiled in controversy, with responses flagged for racism, sexism, and factual inaccuracies. Alphabet’s uphill battle began with Bard’s ill-fated public debut, tainted by the chatbot’s erroneous response related to discoveries from the James Webb Space Telescope.
Contrary to expectations, Bing’s foray into the global search scene post the integration of Microsoft’s Copilot has not catalyzed a seismic shift in market share dynamics. Yet, with Microsoft intensifying its pursuit of the online search domain, the onus rests on Alphabet to defend its market share legacy amidst mounting challenges.
Alphabet Stock Projection for 2030
The outlook for Alphabet stock in 2030 hinges on various facets, prominently including:
- Subscriptions: Alphabet’s stake in subscriptions, currently marking a $15 billion annual run rate, promises to be a seminal revenue stream in the long haul.
- YouTube monetization: YouTube remains a focal point for Alphabet’s subscription revenue continuum. Embedded initiatives such as “Shorts” mirror Alphabet’s intent to diversify revenue channels on the platform.
- Cloud business: The cloud arena stands as a beacon of hope within Alphabet’s portfolio. The segment witnessed accelerated growth in Q4, paralleled by an operating profit surge to $864 million, a stark reversal from the prior year’s operating loss. Sustainable profitability within this realm will only fortify Alphabet’s trajectory.
- Regulatory hurdles: Navigating regulatory tangles remains a persistent challenge for U.S. technology behemoths. Recent fines levied by the European Commission on Apple accentuate this exigency, while Google’s tussle with app developers in India spotlights the evolving regulatory topography.
- Generative AI: Revolutionizing the generative AI landscape stands as an imperative for Google’s longevity. Challenging perceptions of trailing ChatGPT, Alphabet’s Gemini innovation must transcend controversies to solidify its standing.
- Monetization of ‘Other bets’: As the calendar flips to 2030, Alphabet must endeavor to monetize its “Other bets” domain, encompassing entities like the Waymo self-driving unit. While currently a drag on earnings, these latent gems hold potential to substantially augment Alphabet’s value proposition.
Despite prevailing headwinds, the undervaluation of GOOG stock remains an enticing buy proposition. While Alphabet may have ceded a round in the AI arena, the firm’s long-term narrative is far from conclusive. Pitted against frothy valuations in other tech stocks, Alphabet’s resilience amid adversity renders it a compelling long-term investment option.
