Friday, May 24, 2024

Google Parent Alphabet Joins $2 Trillion Club as Results Show AI Strength

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Alphabet Inc. closed decisively above a $2 trillion market capitalization for the first time on Friday, as a powerhouse earnings report reassured investors that the Google parent would be a major player in artificial intelligence.
The stock rose 10% to $171.95, its biggest one-day jump since July 2015, resulting in a valuation of $2.15 trillion. The advance added almost $200 billion to the company’s market capitalization, making for one of the largest single-day value adds in stock market history. Shares have risen 23% this year, compared with the 5.3% gain of the Nasdaq 100 Index. 

The $2 trillion milestone followed the company’s results, where revenue beat expectations on the strength of its cloud-computing unit. Cloud demand was fueled by growth in AI, while Alphabet also cheered investors by introducing a dividend and announcing a $70 billion buyback program.

“Alphabet is tremendously well managed, its free cash flow is absolutely astonishing, and it has a massive R&D budget, so while no one knows what company will have the best AI products, this is a tough one to bet against,” said Wayne Kaufman, chief market analyst at Phoenix Financial Services.

While the stock breached the $2 trillion level on an intraday basis in 2021, and again earlier this month, this is the first time Alphabet has closed above it. Doing so puts it into rarefied territory — only Apple Inc., Microsoft Corp, Saudi Aramco, and Nvidia Corp. have surpassed the threshold. Nvidia — driven by the massive demand for its AI chips — surpassed $2 trillion earlier this year, while Amazon.com Inc. isn’t far from $2 trillion itself.

The path to $2 trillion has been somewhat rocky. The stock has been volatile amid some high-profile criticism about the company’s AI offerings, and prior to the latest report, some investors had questioned its ability to compete with firms like OpenAI in this critical area despite spending heavily in the field for years. 

Wall Street remains broadly positive on the stock, as nearly 85% of the analysts tracked by Bloomberg recommend buying. Both earnings and revenue are expected to grow at a double-digit pace every year through 2026. 

In addition, the stock continues to look like something of a bargain. Shares trade around 23.5 times estimated earnings, making it among the cheapest of the so-called Magnificent Seven. The stock also trades at a discount to the Nasdaq 100, and is only modestly above its 10-year average multiple.

© 2024 Bloomberg L.P.


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