Google Parent's Comeback: Stellar Ad Revenue Recovery, AI-Driven Cloud Momentum Stun Analysts

Alphabet's solid Q2 beat on the back of accelerating ad revenue growth and solid cloud momentum has left analysts impressed.

Alphabet, Inc. GOOGL GOOG reported Tuesday after the close second-quarter results that exceeded expectations, thanks to the strong performance of its cloud business.

The Alphabet Analyst: KeyBanc Capital Markets analyst Justin Patterson maintained an Overweight rating and raised the price target from $140 to $145, suggesting an 18.7% upside from current levels.

The Alphabet Thesis

KeyBanc's Key Takeaways: Ad recovery continued, with search revenue climbing 5% year-over-year, exceeding expectations, and YouTube revenue rising 4%, Patterson said in a note.

The analyst expects Google Properties’ growth to return to low double digits due to easier comparisons in the second half. YouTube Shorts now has 2 billion logged-in users every month, up from 1.5 billion last year, he added.

Cloud revenue growth was also a bright spot, Patterson said, as it climbed 28%, exceeding the 5% growth forecast by KeyBanc, thanks to its artificial intelligence leverage.

The analyst said capex would step up in the second half, potentially leading to modest growth for the year.

“Coupled with 15 properties reaching 0.5B+ users (and six reaching 2B+), we believe Alphabet still has ample levers to drive LDD% revenue growth and EPS growth,” Patterson said.

As such, KeyBanc raised its 2023 and 2024 earnings per share estimates by 4% and 5%, respectively.

See Also: Best Artificial Intelligence Stocks

Munster Pins Hopes On AI: Alphabet reported its second consecutive quarter of accelerating revenue as total revenue growth edged up 3% in the March quarter to 5% in the June quarter, said Deepwater Asset Management's Gene Munster.

The Street is modeling 11% revenue growth for 2024, he noted.

The fund manager noted that Google Cloud outgrew Microsoft Corp.'s MSFT Azure, with the former seeing 28% growth compared to the latter's 27%. Since Azure has a 23% market share compared to Google Cloud's 10% share, it is easier for Google to grow faster, he added.

Munster is optimistic about Alphabet's AI prowess. 

“They have a lot to lose if they miss the AI mark. If they hit the mark, they will have a 5-plus year revenue growth cycle,” he said.

The fund manager also noted that Alphabet is relatively attractive among big techs in terms of valuation. 

“GOOG is the lowest PE multiple at 20x of any big tech. Expected to grow earnings at 18% next year,” he added.

Price Action: Alphabet shares ended Tuesday's regular session up 0.56% at $122.21 and climbed an incremental 6.08% in the after-hours session, according to data from Benzinga Pro.

See Also: Trading Strategies For Alphabet Stock Before And After Q2 Earnings

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