Will Artificial Intelligence (AI) Stock Split Be Buy After Q3 Earnings?

Will Artificial Intelligence (AI) Stock Split Be Buy After Q3 Earnings?

As earnings season begins, all eyes will be on the big tech companies. the alphabet (Gog 1.39%) (Google 1.26%) Financial results for the quarter ending September 30 were recently announced. Once again, the company showed notable progress in both its ad unit and the cloud sector in light of competition from TikTok, Meta platforms, MicrosoftAnd Amazon Remaining.

Over the past few months, Alphabet has invested a significant amount of capital in artificial intelligence (AI) applications and integrated the technology into all aspects of its business. However, Alphabet stock appears to be taking a break at the moment.

Let’s dive into the third-quarter report and take a look at how AI is fueling growth within Alphabet’s ecosystem and assess whether investors should pick up some shares in the face of recent secular pricing action.

Another strong quarter

The majority of Alphabet’s revenue is collected in two categories: advertising and cloud. The table shows the revenue profile for each of these segments for the quarter ending September 30.

purpose Third quarter 2023 Third quarter 2022 % changes
Google search and others $44,026 $39,539 11%
YouTube ads $7,952 $7,071 12%
Google network $7,669 $7,872 (3%)
Google Ads $59,647 $54,482 9%
Google other $8,339 $6,895 21%
Total Google services $67,986 $61,377 11%
Google Cloud $8,411 $6,868 22%

Data source: Third quarter earnings announcement. Dollar amounts in millions. Table by author.

On the advertising front, Alphabet’s revenue increased 9%, mainly supported by Google Search and YouTube. The company’s services business (which consists mostly of advertising) grew 11%.

One important dynamic for investors to understand is that the majority of Alphabet’s operating profits stem from services. According to the earnings report, the company increased services operating income by 26% during the third quarter and achieved a 35% margin.

To put that into perspective, Alphabet’s services operating margin in Q3 2022 was 31%. This is a massive margin expansion, which flows directly to the bottom line.

For the quarter ending September 30, Alphabet reported free cash flow of $22.6 billion, an increase of 40% year over year. By expanding margins and generating more excess cash, Alphabet was able to invest in additional services and resources. Specifically, the company’s foray into generative AI is already yielding significant returns, as underscored by a return to revenue acceleration in advertising, as well as its consistently profitable cloud operations.

Let’s dive into how Alphabet is integrating AI across the business and what management has to say about its future prospects.

Someone who writes computer code.

Image source: Getty Images.

Building an artificial intelligence (AI) ecosystem.

One of the most headline-grabbing topics last quarter was coverage of hedge fund manager Bill Ackman’s position in Alphabet stock. During recent interviews, Ackman noted that he was compelled to use Alphabet because the company is uniquely positioned to leverage its massive data warehouse in a way that can be stitched together across a wide range of products and services that benefits consumers and businesses alike.

Alphabet management spent much of the earnings call providing details on how AI will be more integrated into search and the cloud. On the search front, Alphabet has rolled out a feature called Generative Search Experience (SGE). By incorporating generative AI into search, Alphabet is effectively trying to increase its online surface area. In other words, SGE provides users with more links to choose from, thus “creating new opportunities for content discovery.”

Although these are early innings for SGE, management seems optimistic about its ability to disrupt the current native search advertising structure today.

Another promising opportunity rooted in AI is Alphabet’s big language model. The model, called Google Bard, is designed to be a “complementary experience to Google Search.” Since its commercial release earlier this year, Bard has made significant progress. The tool can now be used between multiple Google apps, including Workspace, YouTube, and Maps.

When it comes to the cloud, Alphabet’s results are very impressive. The company shared that more than half of generative AI-focused startups that have raised external capital are Google Cloud customers.

One of the cornerstones of Google Cloud is a multi-faceted product called Duet AI. Customers like PayPal They use Duet AI to augment software development, while others leverage the tool’s data analysis functionality within Google Workspace applications.

These dynamics confirm exactly what Ackman was going for. In a relatively short time frame, Alphabet has already integrated AI into several different aspects of its business. For this reason, investors could argue that the growth rates in the chart have a great chance of surpassing their current profile.

Is Alphabet stock a buy?

GOOG PE ratio chart

GOOG PE ratio data by YCharts

Alphabet stock is trading well below its previous highs on a price-to-earnings (P/E) and price-to-free cash flow basis. More specifically, the decline becomes more pronounced in the October period, shortly after the company announces third-quarter earnings.

There’s no doubt that Alphabet faces stiff competition from Microsoft and Amazon when it comes to cloud computing and artificial intelligence (AI). But this financial review shows how Alphabet is already benefiting from a range of AI-related products and services. Given that the overall economy remains vulnerable to rising interest rates and inflation, I think it’s reasonable to believe that Alphabet’s advertising and cloud business is not even close to peak performance.

My Fool colleague Keith Speights recently referred to Alphabet stock as a “no-brainer buy.” I completely agree with this position and believe that now represents a great opportunity to buy low-end shares in Alphabet and hold them for the long term. Alphabet has made impressive progress on its artificial intelligence (AI) roadmap, and the company’s strong liquidity profile suggests it has the financial capacity to continue innovating and unleash additional resources at a rapid pace.

As AI becomes more integrated across Alphabet’s ecosystem, users should become more engaged and engaged, which will ultimately lead to further revenue growth and margin expansion. In my view, the current returns from AI efforts are really encouraging, and the best is yet to come.

Susan Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco holds positions at Alphabet, Amazon, Meta Platforms, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft, and PayPal. The Motley Fool recommends the following options: In December 2023, $67.50 is placed on PayPal. The Motley Fool has a disclosure policy.

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