• Alphabet reports earnings after market close on July 23

• Forecasts point to double-digit revenue and earnings growth

• Valuation is cheap against tech giants due to lack of AI exposure

 

Stock shines in 2024

Alphabet, Google's parent company, has been having a very strong year amid an overall tech outperformance. Despite experiencing a significant spike to the downside in February after the problematic launch of its Artificial Intelligence (AI) image generation feature, Alphabet’s stock has managed to largely outperform major US indices.

The firm’s main cash generating machine, advertising, has been growing at an outstanding pace as the US economy is headed for a soft landing and 2024 is a year of major elections across the globe. Meanwhile, more and more businesses have started relying on cloud services, which is another growth lever for Alphabet. Those two segments are anticipated to have boosted the firm’s financials for this quarter, with their respective revenue increasing by 10.82% and 26.39% on an annual basis.

Where should investors focus?

Undoubtedly, Alphabet’s advertising segment has been firing on all cylinders, but the firm has started to face tough competition in its other flagship business, online search, by Microsoft’s AI-powered tools. Therefore, the tech giant is under pressure to develop and implement a clear strategy for expanding its AI capabilities to regain its footing in the online search sector.

In addition to maintaining dominance in its core businesses, Alphabet must also expand its AI offerings in secondary segments. Investors have been increasingly worried about the firm’s over-concentrated business model, whose risks might have been masked by the overall tech outperformance in the past couple of years. On the diversification front, Alphabet could provide some commentary over the rumoured acquisition of the cybersecurity company Wiz.

Strong financials

A solid second quarter performance is foreseen for Alphabet as the tech giant is set to post revenue of $84.20 billion, according to consensus estimates by LSEG IBES, which would represent a year-on-year growth of 12.87%. Aligned with that, earnings per share (EPS) are estimated to increase by 28.18% on an annual basis to $1.85.

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 21.6, 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.

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

Stock drops below 50-day SMA

Alphabet’s stock has been in a steady uptrend since early 2023, posting a fresh all-time high of $191.75 on July 10. However, the stock has been experiencing a minor pullback in the last few sessions amid a broader rout in the tech sector, with the price breaking below its 50-day simple moving average (SMA) on Thursday.

Hence, weak financials could deepen the decline, sending the price to test the June support of $174.00. Even lower, the April support of $163.00 might provide downside protection.

On the flipside, strong earnings mayt propel the price towards the June resistance of $186.00 ahead of the all-time high of 191.75.