Where will Alphabet stock be in five years?

Technology stocks are off to a strong start to 2024. NASDAQ-100 Technology Sector As of this writing, the index clocking is up 9.8%. the same cannot be said alphabet (GOOG 0.82%) (google 0.93%)That’s because the tech giant’s stock price remains unchanged as of 2024.

Alphabet had a solid start to the year, but advertising revenue fell short of market expectations. Additionally, investors have raised concerns about Alphabet’s ability to compete in the generative artificial intelligence (AI) market after its chatbot Gemini faced controversy.

Can the company change the negative investor perception and deliver solid returns to investors over the next five years? Let’s explore.

Alphabet needs to grow at a faster pace

Alphabet’s total revenue in 2023 will be $307.4 billion, up 10% from the previous year. This represents a decline in growth compared to the 14% jump the company recorded in 2022. Analysts expect Alphabet’s revenue growth to improve slightly in 2024, rising 11.4% to a total of $342.6 billion.

However, as the following chart shows, Alphabet’s growth rate is expected to slow slightly over the next few years.

GOOG revenue estimates for current fiscal year data via YCharts

There are several reasons why this may be so.

First, the company’s advertising business is under the following threats. meta platform (meta -0.84%). Alphabet’s Google advertising revenue rose 6% to $237.8 billion in 2023. Meanwhile, Metaplatform saw its advertising revenue grow 16% to $132 billion last year. It is worth noting that the digital advertising market recorded a growth of 10.7% in 2023, according to eMarketer. So Meta growing faster than the digital advertising market means Meta is gaining share in Alphabet’s lucrative niche.

Moreover, Alphabet’s projected 2024 revenue growth means it may continue to lose share to Meta. This is because the digital advertising market is expected to grow by 13.2% this year, and analysts expect Meta’s sales to increase by 17% in 2024.

Alphabet’s growth is also expected to be mediocre due to competition in the cloud computing business. In the fourth quarter of 2023, Google Cloud revenue grew an impressive 26% year-over-year to $9.2 billion, but its competitors microsoftof Azure cloud grew 30% year-over-year in the quarter due to increased adoption of AI-centric cloud services.

All of this points to why investors appear to be favoring other “Magnificent Seven” stocks over Alphabet this year. There’s no doubt that Alphabet is trying to enter the generative AI market, with executives outlining the company’s AI-related efforts at length on its January earnings conference call, but the numbers indicate that its peers are using the technology as well. A better way to improve your financial performance.

But there’s one reason investors might still want to take a chance on Alphabet and consider buying the stock now for the long term.

Valuation suggests investors are getting a good deal on the stock.

A surge in the stock price of Alphabet’s Magnificent Seven peers means they are trading at high valuations (see chart below).

GOOG PE Ratio Data from YCharts

Buying Alphabet at this valuation could be a smart long-term move. We’ve seen that its cloud business is already growing at a healthy pace, and some analysts believe it could gain a presence in the generative AI market as well. JP MorganDoug Anmuth, who has an overweight rating on Alphabet stock, predicts the company could make a comeback in the generative AI space.

This isn’t surprising, as companies are aggressively adding generative AI tools to their advertising tools to deliver greater returns to advertisers. So with the stock trading at 23 times trailing earnings and 20 times forward earnings (a discount to the Nasdaq 100’s earnings multiple of 32 (using a proxy index for technology stocks)), investors are getting a good entry point.

Analysts predict that Alphabet’s revenue will grow at a CAGR of 19% over the next five years. Based on 2023 earnings per share of $6.79, the company’s earnings could grow to $13.84 per share within five years. If Alphabet’s growth returns by then and the market rewards it with higher earnings multiples, the tech stock could deliver impressive gains.

Even if Alphabet trades at 24 times its five-year forward earnings (equivalent to its five-year average forward price-to-earnings ratio), its stock price could skyrocket to $332 in five years. That’s a 138% increase from current levels, so it may be a good idea to buy Alphabet while it’s still cheap.