• Alphabet reports earnings after market close on April 25

• Forecasts point to double-digit revenue and earnings growth

• Despite stock rally to record highs, valuation is cheap against tech clan

Core business shines, but focus shifts on AI

After an outstanding 2023, Alphabet has started 2024 on a firm note, outperforming major US indices amid heightened volatility. This solid performance is mainly attributed to the firm’s dominant position in advertising and online search businesses.

However, Alphabet’s stock experienced a significant spike to the downside in February after the problematic launch of its Artificial Intelligence (AI) image generation feature, Gemini, which proved to be dysfunctional. In general, investors are not convinced that Alphabet could indeed thrive in the AI space as it has not yet delivered any standout AI-related tools.

Therefore, given Alphabet’s significant reliance on its ad segment and the increasing competition from AI-powered search engines, investors are expecting the firm to expand its AI capabilities for both diversification and growth purposes.

Solid advertising and cloud business

Alphabet’s main cash generating machine, advertising, has been growing at an outstanding pace following the shift in market expectations from a recession to a soft landing for the US economy. For this quarter, analysts are projecting a 10.31% increase in advertising revenue on an annual basis.

Meanwhile, more and more businesses have started relying on cloud services, which is another growth lever for Alphabet. Despite lagging against its peers in the cloud business, Alphabet’s cloud division is anticipated to grow 25.00% year-on-year in the examined quarter.

Strong financials

A solid first quarter performance is foreseen for Alphabet as the tech giant is set to post revenue of $78.59 billion, according to consensus estimates by LSEG IBES, which would represent a year-on-year growth of 12.62%. Aligned with that, earnings per share (EPS) are estimated to increase by 29.57% on an annual basis to $1.52.

Attractive valuation

From a valuation perspective, Alphabet is trading at a discount to the tech-heavy Nasdaq probably due to the firm’s lagging position in the AI race. Interestingly though, Alphabet’s forward Price-to-Earnings ratio is currently standing at 21.5, below its five-year average of 23.7. Therefore, combining its strong fundamentals with the relatively cheap valuation, Alphabet’s stock could be considered a bargain at current levels.

Undoubtedly, Alphabet is one of the leading tech companies with strong and stable income streams but appears to be lacking the AI premium. Therefore, the firm remains under pressure to exhibit progress in its AI segment to reclaim its historical multiples.

New record high in sight?

Alphabet’s stock has been developing within a bullish channel since early 2023, posting a fresh all-time high of $160.00 on April 15. However, the stock has been experiencing a minor pullback in the last few sessions amid a broader rout in the US equity indices.

Therefore, a positive earnings surprise could bring the all-time high of $160.00 under scrutiny ahead of the $170.00 psychological mark.

On the flipside, downbeat financials might shift the spotlight towards the recent support of $152.20. Even lower the March support of $146.30, which overlaps with the 50-day simple moving average (SMA), may provide downside protection.