Alphabet: Arrows Point To Jaw-Dropping Second Quarter

Summary

• Google is significantly undervalued due to fears about AI competition and regulatory risks, despite extraordinary innovation and operational improvements.
• I expect Q2 to deliver accelerated growth across Search, YouTube, and Google Cloud, with AI-driven ad pricing and engagement fueling revenue upside.
• Current valuation offers a rare opportunity: at 17x earnings, the market expects revenue deceleration and near-term disruption, while I expect exactly the opposite.
• I reiterate a 'Strong Buy' rating, targeting $205/share (22% upside), as upcoming results should silence critics and rerate the stock higher.

Alphabet (NASDAQ:GOOG) shares are down 12% year-to-date, as voices about its doom are growing increasingly louder.

We've all heard the pundits declaring the end of search and the '10-blue-links' economy, as well as the criticism over Google's productization and execution.

I expect the upcoming second-quarter will leave these doubters speechless. I estimate it will be one of the best quarters in recent years for Google, with growth acceleration in all key segments, including YouTube, Search, and Google Cloud.

If I'm right, shares are set for a significant surge.

Let's dive in.

Introduction

For whatever reason, Google has been one of the most criticized companies in public markets under Sundar Pichai's leadership. It all reached a boiling point in the early months after the ChatGPT launch, when calls for his ousting reached a peak.

I too have felt frustration with certain aspects of Google, especially post-2022, as I thought the company isn't doing enough to improve efficiencies and their perception as a bloated, complacent, conglomerate.

However, I believe that from that low-point, Google, led by Sundar, completely flipped the switch. Over the past couple of years, I can't name many companies that drove more innovation, introduced more products, realigned their cost base, and essentially did all that investors could have hoped for, at the level Google did.

And yet, shares haven't been playing along lately:

Of course, a key reason for this relative underperformance is increasing regulatory scrutiny, as the hammer of the judge has never been this close to actually changing Google's structure, and punishing the company with something beyond a fine.

That said, I think it's undeniable that most of Google's underperformance is a result of fundamental concerns over search losing to ChatGPT, execution, and uncertainty regarding the Apple relationship.

First-Quarter Results Were Good, But Not Enough To Silence The

Analyst’s Disclosure:I/we have a beneficial long position in the shares of GOOG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.