Amid worries over a U.S. recession, how resistant is Google-parent Alphabet‘s (GOOGL) digital advertising business to an economic downturn? That’s a key question for investors eyeing GOOGL stock.
Despite mounting competition in artificial intelligence and internet search, Google stock has advanced 35% this year. That’s just above the 31% jump in the Nasdaq composite.
A few technical ratings of GOOGL stock have weakened. But Google stock has found support at its 50-day moving average.
GOOGL Stock: AI Battle Rages
One concern for GOOGL stock is new competition in internet search.
Google aims to counter Microsoft‘s (MSFT) investment in artificial intelligence startup OpenAI by making its own generative AI tools available to software developers. One big question is whether integrating chatbot AI technology into search queries will lower Google profit margins.
UBS downgraded GOOGL stock on June 26, followed by a Bernstein Research downgrade on June 27. At UBS, analyst Lloyd Walmsley said Google’s transition to internet search using generative artificial intelligence will slow advertising revenue growth.
Meanwhile, “Google’s aggressive push to integrate generative AI into core search results could create a near-term air pocket on search ad pricing,” Bernstein analyst Mark Shmulik said in a note to clients.
Alphabet’s earnings have dropped by double-digit percentages, year over year, for the last three quarters. Also, revenue has grown only in the single digits for three quarters. The good news is that year-over-year comparisons will get easier in 2024.
At the Google I/O 2023 developers event on May 10, Alphabet showcased how generative AI will be integrated into search, maps, Workspace, photos, cloud computing and Android devices. Google discussed how advertising will evolve as generative AI is added to search.
At Google Marketing Live on May 23, Alphabet announced AI tools to allow advertisers to essentially synthesize a unique text or display ad, in real time, based on the user’s query and advertiser data supplied to Google. The tool will reportedly be free for advertisers.
Google Stock: Pichai Pay Jumps
Google’s board of directors has authorized an additional $70 billion in stock repurchases. In the first quarter, the company repurchased $14.6 billion of its own stock.
According to JP Morgan, Alphabet has been increasing its stage in GitLab (GTLB). Google Ventures in May bought $19.7 million of GTLB shares. Google Ventures and Alphabet now own 3.4% of GitLab, which offers software programmers an open source app development platform.
Amid pressure to cut expenses, Alphabet disclosed that Chief Executive Sundar Pichai’s pay jumped to $226 million in 2022, due to a big stock award.
Meanwhile, Alphabet has stepped up cost cutting.
Google stock on Jan. 20 said it will cut 12,000 jobs, or roughly 6% of its global workforce, adding to a growing wave of layoffs among U.S. technology companies. The layoffs follow a hiring spree at the company.
The U.S. Department of Justice on Jan. 24 filed antitrust charges against Google, leaving open the question of whether the search giant will have to divest some of its ad business in order to satisfy regulators. The DOJ claims Google’s dominance in digital advertising harms competition.
GOOGL Stock: Justice Department Files Suit
The lawsuit marks the DOJ’s second antitrust case versus the internet giant in just over two years. The DOJ in October 2020 filed an antitrust lawsuit charging that Google has monopolized internet search and search-related advertising. That case is scheduled to go to trial in September.
YouTube Chief Executive Susan Wojcicki in February announced her departure. She was replaced by long-time YouTuber Neal Mohan.
Meanwhile, lawmakers and courts are closing in on fundamental changes to Section 230 of the Communications Decency Act. The law has shielded internet companies from liability for content on their sites for nearly three decades.
The internet giant completed a 20-for-1 split for shares of Google-parent Alphabet after the market close on July 15 2022.
In the long run, however, the GOOGL stock split could pave the way for the tech giant to enter the Dow Jones Industrial Average. Google stock could be more attractive to retail investors.
Due to its huge cash holdings, Google stock has shrugged off three fines totaling $9.3 billion levied by the European Union on antitrust grounds.
Boosting Ad Business Through E-Commerce
Google’s internet search business will hold up better than other advertising formats, such as social media, analysts say.
Google has rolled out the Performance Max advertising platform. It automates buying across YouTube, internet search, display, Gmail, maps and other applications. Performance Max lets advertisers manage campaigns across all Google ad inventory. Advertisers that use the tools convert more shoppers into buyers, Google says.
The big picture: Google stock this year faces more difficult year-over-year growth comparisons in 2023 as the coronavirus emergency fades.
In a near-term boost for its advertising business, Google has delayed phasing out internet cookies to 2024. Also, in early 2022, Alphabet said it expected a “meaningful increase” in 2022 capital spending, reflecting investments in computer servers in internet data centers and construction of office space.
Google Stock: Artificial Intelligence Prowess
Most investors still know the company as Google, even though the internet search giant reorganized as holding company Alphabet in 2015. The restructuring move separated Google’s core internet advertising business from so-called moonshots, such as autonomous vehicles and the Verily Life Sciences unit.
In March 2022, Google spun off its quantum computing technology group as a separate company.
Google stock’s strength in artificial intelligence spans digital advertising, the Google Cloud Platform, YouTube and consumer hardware products. GOOGL stock is just one artificial intelligence stock to watch.
At a Google developers conference in mid-May, the company demonstrated how it uses AI tools in a wide range of applications, including Google Workspace, Google Maps, virtual reality, and voice-based search.
After a long run, GOOGL stock has dropped out of the IBD Leaderboard. The Leaderboard is IBD’s curated list of leading stocks that stand out on technical and fundamental metrics.
Big Tech Stocks Face Regulatory Headwinds
With the Android mobile operating system built into devices sold worldwide, the Play Store has been a revenue growth driver.
A federal judge ruled in September 2021 that Apple (AAPL) must allow mobile app developers to steer consumers to outside payment methods. Google’s policies also are under scrutiny.
Google in 2021 said service fees at its Play Store would drop to 15% from 30%. The move reduced revenue.
Under Pichai, Google has improved transparency. Google began disclosing cloud computing financial metrics with its fourth-quarter report in fiscal 2020. But the cloud business has yet to turn a profit. And YouTube’s profitability still remains a mystery.
Google Stock Fundamentals
For the March quarter, Google earnings were $1.17 a share, down 5% from the year-earlier period. Google recorded $2.6 billion in one-time charges.
Further, gross revenue rose 3% to $69.79 billion.
Analysts had predicted Google earnings of $1.08 per share on revenue of $68.9 billion. A year earlier, Google reported earnings of $1.23 a share on revenue of $68 billion.
Meanwhile, advertising revenue was roughly flat at $54.55 billion versus estimates of $53.8 billion.
Meanwhile, YouTube ad revenue dipped 2% to $6.69 billion but topped views amid lowered expectations. Analysts had estimated YouTube ad revenue of $6.6 billion.
Google said cloud-computing revenue rose 28% to $7.45 billion, slightly missing estimates of $7.46 billion. Google’s cloud business posted revenue growth of 44% in the year-earlier period.
Waymo Autonomous Vehicle Business
A key question for investors is how much should Google’s self-driving-car project Waymo and “Other Bets” such as the Verily Life Sciences unit figure into valuation.
In early 2018, some Google stock analysts projected Waymo’s long-term valuation in a range of anywhere from $75 billion to $125 billion. Expectations for autonomous vehicles, though, have been sharply lowered.
Waymo in 2021 raised $2.25 billion in funding from outside investors. including private equity firm Silver Lake, the Canada Pension Plan Investment Board and Abu Dhabi’s Mubadala investment arm.
While Google did not disclose Waymo’s valuation in the funding round, reports said it was only $30 billion. It could be lower now.
Google Stock: Cloud, Hardware, Security Acquisitions
Another question is the performance of Google’s hardware business. It’s battling Apple in smartphones and Amazon in smart-home appliances.
Also, Google’s acquisition of smartwatch maker Fitbit closed in January 2022. The $2.1 billion purchase should help Google make a push into the health and fitness market, analysts say.
Google’s cloud computing business, meanwhile, faces tough rivals in Amazon and Microsoft. Google brought in Thomas Kurian, a former Oracle (ORCL) executive, to improve performance in the corporate market.
Bulls say Google Cloud Platform is taking share as it focuses on security, open source software and data analytics.
In 2019, Google purchased data analytics firm Looker for $2.6 billion in cash. Santa Cruz, Calif.-based Looker’s analytics platform uses business intelligence and data visualization tools.
More acquisitions to boost Google’s cloud business could be coming, analysts say. Google acquired cybersecurity firm Mandiant (MNDT) for $23 per share in an all-cash $5.4 billion deal.
Google Stock: Is It A Buy Now?
GOOGL stock jumped 65% in 2021. But in 2022 Google shares dropped 39%.
Google stock owns an Accumulation/Distribution Rating of C-plus. That rating analyzes price and volume changes in a stock over the past 13 weeks of trading.
Further, shares hold an IBD Composite Rating of 91 out of 99. The best growth stocks have a Composite Rating of 90 or better.
Google stock in 2023 broke out of a cup-with-handle base at a buy point of 106.59, according to IBD MarketSmith charts.
As of July 10, Alphabet stock is extended. It trades above a buy zone. Investors may want to be cautious amid worries over a bubble in artificial intelligence stocks.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and 5G wireless.
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