Alphabet Joins $2T Club, More Growth Likely: ETFs to Win

On Apr 26, 2024, Google-parent Alphabet Inc. GOOGL officially joined the prestigious $2 trillion club, making it the fourth U.S. company to achieve this market-capitalization milestone. On Apr 26, Alphabet's shares surged 10.2% in its most significant daily climb since July 2015, as reported by Dow Jones Market Data, as quoted on MarketWatch.

This substantial increase drove the stock to a new record high and pushed Alphabet's outstanding shares past the $2 trillion threshold for the first time. Among U.S. companies, only Apple Inc. AAPL, Microsoft Corp. MSFT and NVIDIA Corp. NVDA have previously attained a valuation exceeding $2 trillion.

The scenario puts focus on Alphabet-heavy ETFs like iShares Global Comm Services ETF IXP, Communication Services Select Sector SPDR Fund XLC, Vanguard Communication Services ETF VOX and Fidelity MSCI Communication Services Index ETF FCOM. These ETFs put 14% to 11% share in the stock. With Alphabet's upbeat prospects, the ETFs, too, should benefit.

Inside Q1 Earnings Snapshot

Alphabet's first-quarter 2024 earnings of $1.89 per share beat the Zacks Consensus Estimate by 26.8% and year-ago earnings by 61.5%. The tech giant posted revenues of $67.59 billion for the quarter ended March 2024. The top line surpassed the Zacks Consensus Estimate of $66.04 billion by 2.35%.

Solid Beat Across Most Main Segments

Revenues from the Google Services business increased 13.6% year over year to $70.4 billion, beating the Zacks Consensus Estimate of $69.04 billion. Under this business, search revenues from Google-owned sites increased 14.4% year over year to $46.16 billion, surpassing the Zacks Consensus Estimate of $44.7 billion.

YouTube's advertising revenues improved 20.9% year over year to $8.1 billion, topping the Zacks Consensus Estimate of $7.7 billion. Google Cloud revenues rose 28.4% year over year to $9.6 billion, beating the Zacks Consensus Estimate of $9.2 billion. However, network advertising revenues of $7.4 billion failed to meet the consensus mark of $7.7 billion.

Dividend Increase Signals Investor Reward

Alphabet announced that its board has sanctioned a cash dividend of $0.20 per share, payable on Jun 17, 2024, to shareholders recorded as of Jun 10. Moving ahead, Alphabet plans to uphold a quarterly cash dividend distribution policy.

Key Positives From Q1 Earnings

The company continues to spend big on its AI initiatives and technical infrastructure. Google Cloud Platform's growth accelerated in Q1 sequentially as well as year over year, indicating strong momentum. Management noted that more than 60% of funded GenAI startups and nearly 90% of GenAI unicorns are currently Google Cloud customers.

Meanwhile, YouTube Shorts monetization continues to improve.Over the last 12 months in the United States, the monetization rate of Shorts relative to in-stream viewing doubled. Management's focus on cost management is a positive.

Total operating margin rose about 700 bps year over year in Q1, indicating improved operational efficiencies. Core Google Services' operating margin was around 40%, a multi-year high, as year-long cost management started to show effects.

Other Tailwinds That Support Near-Term Upside Potential

The stock hails from theZacks-defined Internet – Services industry, which currently ranks in the top 19% out of approximately 250 industry groups. Because it is ranked in the top half of all Zacks Ranked Industries, we expect this group to outperform the market over the next 3 to 6 months.

Historical research studies suggest that approximately half of a stock's price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1. Alphabet's underlying sector – Computer and Technology, also ranks in the top 38% out of 16 sectors. The stock has an upbeat VGM Score of "B."

Why Tap Alphabet Via ETFs?

While Alphabet soared past earnings estimates, the company is still suffering from uncertainty about how to monetize conversational search (as highlighted by an analyst, as quoted on Guardian). Coming to competition on generative AI, both Microsoft and Amazon are making concerted efforts to bring advancement into OpenAI's ChatGPT and Amazon Bedrock, respectively. Plus, the company is facing increased regulatory scrutiny in the United States and overseas. T

As we all know that the ETF approach gives investors the option to diversify company-specific concertation risks. Investors should note that the above-mentioned ETFs — IXP, XLC, FCOM and VOX — have invested about 20% weight each in Meta META. Meta's performance thus affects these ETFs greatly.

Meta shares were hit hard last week due to the issuance of downbeat Q2 revenue guidance. Meta, which currently has the best VGM Score of "A" may start to recoup losses fast in the near term. Meta has about a 19.48% upside potential from the last traded price, based on the average target price offered by Wall Street analysts.

Hence, with the ETF approach, investors can diversify risks associated with GOOGL or META. In fact, both big tech stocks in one basket (especially with heavy weights) enhance the chances for the outperformance of those ETFs.

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