Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) has suffered from a lack of respect lately. Although it has been an innovator in artificial intelligence (AI) for more than 20 years, investors are now questioning its future in the sector.
Additionally, negative market perceptions appear to persist despite the company’s respectable fourth-quarter results. After Tuesday’s fourth-quarter report was released, the stock price fell 6% after hours.
Despite the negativity surrounding this communications equipment, it would be premature to exclude the company. Three factors allow Alphabet to maintain a considerable competitive advantage and continue its growth.
1. The advertising segment remains robust
Given Alphabet’s recently increased interest in AI, one might forget that it remains primarily an advertising company. This segment earned $66 billion in income in the fourth quarter, growing 11% year-on-year and representing 76% of the company’s revenue. The advertising segment accounted for 78% of the company’s revenue in the fourth quarter of 2022.
Most of the revenue came from Google Search, which brought in $48 billion in the fourth quarter, 13% more than last year. Additionally, YouTube continues to grow in popularity, especially the YouTube TV service. This segment generated $9.2 billion in revenue in the fourth quarter, up from nearly $8 billion a year earlier.
Even though its share of revenue is down slightly, advertising remains the company’s driving force, and given that its growth continues, investors shouldn’t expect that to change anytime soon .
2. Cloud improvement bodes well for Alphabet’s AI
Outside of advertising, the company’s most notable growth segment has been Google Cloud. It reported quarterly revenue of $9.2 billion, an increase of 26% year-over-year. This continued Alphabet’s trend of focusing more on cloud and AI.
During the fourth quarter earnings call, CEO Sundar Pichai highlighted the company’s work in AI and highlighted Google DeepMind’s work in generative AI with Gemini, its family of large language models.
This is important as investors appear to be turning away from Alphabet following the release of ChatGPT last year. OpenAI, the developer of ChatGPT, has a close relationship with Microsoft, and for the first time in decades, Google Search’s dominance seemed under threat. Nevertheless, Gemini shows that Alphabet is not going to abandon its position.
3. Alphabet’s cash flow remains formidable
Additionally, even if these searches fail, investors often overlook the company’s enormous cash flow. Alphabet reported $111 billion in liquidity at the end of 2023.
Of course, there were slip-ups. A year earlier, Alphabet reported $114 billion in liquidity. Additionally, its free cash flow of nearly $8 billion in the fourth quarter of 2023 was less than half of the $16 billion generated in the fourth quarter of 2022. An increase in the company’s income tax expense in 2023 was responsible for most of this decline.
Alphabet’s cash and short-term investments give it one of the strongest balance sheets in the corporate world. If it needs to buy companies to gain advantages in AI or any other area, it has the resources to strengthen and expand its competitive advantage.
Making sense of Alphabet’s fourth quarter
Investors haven’t abandoned Alphabet as much as one might assume. Over the past year, Alphabet stock is still up more than 50%. Its P/E ratio of 29 is reasonable for a growth tech stock, but probably not the bargain valuation some might assume.
Ultimately, Alphabet’s fourth-quarter results should remind investors to focus on the company’s long-term future. Indeed, Alphabet’s AI faces more competition, and declines in financial metrics such as liquidity and free cash flow may have disappointed some investors.
Nevertheless, the company continues to derive its growth from a dynamic advertising sector. Additionally, the growth of the cloud and its research bodes well for AI, and since the company has considerable resources, it can invest to maintain or expand its competitive advantages. This should mean that Alphabet will remain a player in the AI space, which should enrich its shareholders in the long term.
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Suzanne Frey, an executive at Alphabet, is a member of the board of directors of The Motley Fool. Will Healy has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Alphabet and Microsoft. The Motley Fool has a disclosure policy.
3 takeaways from Alphabet’s fourth quarter that bode well for its stock was originally published by The Motley Fool
