Will Google Stock Make You Rich?

Does Wall Street tech darling Alphabet Inc. (GOOGL) still have the capability to make an investor rich?  

“Magnificent 7” stock Alphabet Inc. (NASDAQ:GOOGL), Google’s parent company, has been a long-time favorite to investors. Ever since its inception in 1998, Google has pushed the boundaries of the tech-sphere, becoming the most commonly used search engine around the world.

Its market share in the global search engine market is more than 90%, hugely outpacing its competitors like Bing and Yahoo. Although the company’s revenue is still majorly driven by its incredible worldwide search engine, it has a remarkably diversified operating structure.

While the company remains a Wall Street favorite, can it make shareholders wealthy, just like it did in the past?

Stalling Advertisement Revenue Growth

Alphabet generates the majority of its revenues from online advertising, which accounted for 77% of its total revenues in 2023. Over the years, the company has acquired ad tech enterprises to broaden its reach.

However, ad revenue growth has been choppy in recent years. Although Google’s advertising revenues are still growing due to increasing user adoption, the rate of growth has been stalling for some time now.

In 2021, Google’s advertising revenues increased by 43% year-over-year to $209.50 billion while in 2022, this figure grew by just 7% year-over-year to $224.47 billion, and in 2023 by just 6% to $237.86 billion.

Google’s main channels for earning this ad revenue are classified into three segments. The bulk of this figure comes from the Google Search & Other segment, which shows slowing growth.

Segment revenue increased by a whopping $44.9 billion in 2021 and then stalled to subsequent increases of $13.5 billion and $12.6 billion in 2022 and 2023, respectively.

YouTube ad revenue shows a different trajectory, increasing by $9.1 billion in 2021, stalling to a meager – by its own standards – increase of $398 million in 2022 due to unfavorable foreign currency exchange rate impacts, and then picking up again to rise by $2.3 billion in 2023 due to increased advertiser spending.

The Networking segment bore the brunt of the slowdown. Revenues in this area increased by $8.6 billion in 2021 but slowed to a $1.1 billion increase in 2022 due to the effect of foreign currency rates.

Furthermore, the networking segment top line contracted by $1.5 billion in 2023 resulting from a decrease in Google Ad Manager and AdSense revenues.

What Prospects Does Alphabet Have?

Starting out as “just” a search engine, Google has significantly diversified into a technology conglomerate. Last year, Alphabet launched Gemini, recognizing the reach of generative AI.

While Alphabet is not as prominent in the AI race as many would have liked, it still has significant prospects to scale this side of its business. Gemini, Google’s best AI model, is the brainchild of Google DeepMind, the company’s AI research lab.

Gemini 1.0 was launched in three model sizes, and the first AI model to outperform humans on Massive Multitask Language Understanding (MMLU), which is a popular method of testing an AI model’s competence. The company launched Gemini 1.5 last month, with operational improvements over its earlier version.

While stalling ad revenues remains a concern for the company, it is expecting significant tailwinds from incorporating artificial intelligence into its search engine and powering the conversational experience of Google Ads.

Alphabet CEO Sundar Pichai pointed out how its AI ventures are helping its search. He reported that Gemini is making its Search Generative Experience (SGE) faster, with a 40% decline in latency across English-based searches in the U.S. The company has also not abandoned Bard. The conversational tool is now a part of Gemini.

Alphabet has also ventured across different sectors, tapping into a diverse revenue stream and an extensive moat. The tech conglomerate has spread its influence far and wide through mergers and acquisitions, the most significant of which was, of course, the $1.65 billion purchase of YouTube.

Companies such as Verily (a life sciences research organization), Waymo (a self-driving technology firm), and Fitbit (a fitness product company) have also contributed to its growing market reach.

Former CEO Larry Page once wrote that “Alphabet is mostly a collection of companies.” This statement remains true to how Alphabet is operating now and its goal of diversification.

Furthermore, unlike a lot of other large conglomerates, it does not pay a dividend on its common stock, electing to reinvest in the business instead, which is quite clear from its aggressive expansion plans over the years. Indeed that’s why the company was named “alpha” bet, or in other words a bet that it will outperform the market.

Will Google Stock Make You Rich?

According to 46 analysts, Google stock has the potential to rise to $163.93 per share, making shareholders 15.7% richer in the process.

Google has come a long way since its nascent search engine days. The company’s recent past has also been favorable. Over the past five years, Alphabet’s stock has risen by more than 130%.

Compared to its gains, its valuation remains fairly reasonable. The stock is trading at 20.43x its forward non-GAAP earnings per share.

When factoring in the growth, its forward non-GAAP price-earnings-to-growth (PEG) ratio is just 1.24.

On the whole analysts are upbeat with 31 providing Alphabet with a “Buy” rating. The stock still has room to run according to the consensus price target.

Moreover, while ad revenues are stalling, Alphabet’s subscription revenue growth is experiencing an uptick. Between 2021 and 2022, its subscriptions, platforms, and devices revenues grew by $1 billion, while its YouTube subscription services upsurge led to an increase of $5.6 billion between 2022 and 2023.

Furthermore, as of year-end 2023, Alphabet had $110.9 billion in cash, cash equivalents, and short-term marketable securities. Hence, the company’s growth initiatives are supported by a stable liquidity position.

Overall, looking at its prospects and reasonable valuation, Alphabet still has upside though modest relative to the past.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.