On Wednesday, BofA Securities adjusted its outlook on Alphabet Inc. (NASDAQ:GOOGL), raising the price target to $210 from the previous $206, while maintaining a Buy rating on the stock.
The move follows Alphabet's third-quarter net revenue report, which exceeded expectations at $74.5 billion, compared to the anticipated $72.8 billion. This beat was largely attributed to significant gains in the Cloud segment and other revenues.
The analyst from BofA Securities highlighted that Alphabet's Search revenues saw a year-over-year increase of 12.2%, aligning with projections, while YouTube's revenue grew by 12%, slightly above expectations. Both segments, however, experienced a deceleration in growth on a quarter-over-quarter basis.
Notably, the Cloud division outperformed, with growth accelerating to 35% year-over-year, surpassing the Street's forecast of 29%. Additionally, Cloud margins improved by 582 basis points quarter-over-quarter, reaching 17%.
Alphabet's other income also surpassed estimates, coming in at $3.2 billion, which contributed $0.16 to the earnings per share (EPS) beat. EPS was reported at $2.12, well above the Street's prediction of $1.85.
The analyst suggested that the company-wide benefits of artificial intelligence (AI) are outweighing any potential disruption headwinds, positioning Alphabet as a net AI beneficiary, as evidenced by Cloud performance in the third quarter and Search in the second quarter.
Despite potential negative catalysts such as product rollouts from competitors and regulatory actions, the analyst believes that the market might be undervaluing the benefits Alphabet could reap from AI in the upcoming year. Moreover, with the company's headcount remaining relatively flat year-over-year, there is an expectation of a favorable cost basis that could drive robust EPS growth.
The price target increase is based on higher projected core EPS for 2025 and an unchanged price-to-earnings (P/E) multiple of 22, plus cash reserves. With the after-hours stock price standing at $181, the analyst estimates that Google's core Search business is trading at an attractive 15 times its projected 2025 EPS, compared to the S&P 500's multiple of 21.
In other recent news, Alphabet Inc.'s Google has been granted a temporary halt to the mandated overhaul of its Play store by a U.S. District Judge in California, amid ongoing antitrust litigation with Epic Games.
The company has also been the subject of analyst attention, with TD Cowen maintaining a Buy rating on Alphabet stock and predicting a 13.0% year-over-year increase in gross revenue for the third quarter of 2024. Truist Securities has raised Alphabet's stock target and reiterated a Buy rating, forecasting strong performance in Alphabet's Search, YouTube, and Cloud sectors.
Evercore ISI has also suggested a potential upside for Alphabet's stock, citing positive intra-quarter advertising channel checks, while Goldman Sachs has reduced Alphabet's stock target. These are recent developments and do not indicate future performance.
In addition, Google has inked a deal with Kairos Power to secure electricity from small modular reactors, marking a first for the tech giant. This move aligns with a growing trend among tech companies to meet their expanding energy needs through nuclear power.
Lastly, Google's artificial intelligence prowess has been underscored by recent Nobel prizes awarded to its experts, demonstrating the company's significant contributions to the field.
InvestingPro Insights
Alphabet's strong financial position and market performance are further underscored by recent data from InvestingPro. The company's market capitalization stands at an impressive $2.1 trillion, reflecting its dominant position in the tech industry. Alphabet's P/E ratio of 24.16 is particularly noteworthy when considered alongside its PEG ratio of 0.5 for the last twelve months as of Q2 2024, suggesting that the stock may be undervalued relative to its growth potential.
InvestingPro Tips highlight Alphabet's financial strength, noting that the company "holds more cash than debt on its balance sheet" and that its "cash flows can sufficiently cover interest payments." These factors align with the analyst's positive outlook on the company's cost management and potential for EPS growth.
Furthermore, Alphabet's revenue growth of 13.38% over the last twelve months and its strong operating income margin of 31.03% support the BofA Securities analyst's observations about the company's performance across various segments, particularly in Cloud and Search.
For investors seeking a deeper understanding of Alphabet's potential, InvestingPro offers 11 additional tips, providing a comprehensive analysis of the company's financial health and market position.
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