Alphabet (GOOGL) Rides on Cloud Momentum Led by Gen AI Strength

Zacks Equity Research
·4-min read

Alphabet’s GOOGL shares have rallied 23.5% year to date, outperforming the Zacks Internet-Services industry’s growth of 19.3%. The company is cashing on solid momentum in the cloud computing business, Google Cloud, which is enjoying growing customer momentum due to generative AI strength.

The latest extended partnership between Google Cloud and Workday is a testament to the same. The objective behind this deal is to accelerate the integration of generative AI technology into the Workday platform.

Workday plans to leverage Google’s Gemini models and Vertex AI in order to aid in quick AI-powered code generation, troubleshooting and information retrieval. This will expedite transaction and closing processes on the Workday platform.

This partnership will enable Workday customers to use Google's GenAI tools to carry out their search and analysis activities seamlessly. It will also aid in new purchase requisition workflow development and deliver enhanced new-hire onboarding experiences.

The Workday partnership has added strength to Google’s cloud customer base.

Alphabet Inc. Price and Consensus

Alphabet Inc. Price and Consensus
Alphabet Inc. Price and Consensus

Alphabet Inc. price-consensus-chart | Alphabet Inc. Quote

Generative AI Strength: Key Catalyst

Growing generative AI capabilities position Alphabet well to capitalize on the growth prospects in the booming generative AI market, which, per a report from Fortune Business Insights, is expected to reach $667.96 billion by 2030, seeing a CAGR of 47.5% between 2023 and 2030.

Google is capitalizing on the increasing demand for large language models (LLMs) with its most powerful AI model, Gemini.

The company’s launch of an enterprise-focused AI code completion and assistance tool, Gemini Code Assist, is noteworthy.

Solid momentum in Google’s Vertex AI, which enables developers to train, tune, augment and deploy applications using generative AI models, is another positive.

Google recently introduced various open-source tools to support generative AI projects and infrastructure. The new tools include the likes of MaxDiffusion — a collection of reference implementations of various diffusion models, JetStream — a new engine to run generative AI models, MaxText — a collection of text-generating AI models targeting tensor processing units, and NVIDIA’s GPUs in the cloud.

Expanding Customer Base Aids Prospects

Strengthening generative AI capabilities are expected to continue driving Alphabet’s customer momentum in the cloud computing market.

Recently, Cintas partnered with Google Cloud to develop a generative AI-powered knowledge center to accelerate its digital transformation. Cintas will leverage Google Cloud’s Vertex AI in order to build its own gen AI-backed search engines to empower employees.

Victoria's Secret & Co. VSCO also announced a multi-year strategic partnership with Google Cloud to enhance online shopping experiences globally and improve operational efficiency.

Victoria’s Secret is utilizing Google Cloud’s AI and generative AI technologies to develop a novel conversational assistant that will provide personalized product recommendations. Powered by Vertex AI, the chatbot intends to deliver individualized advice based on unique preferences and experiences.

An expanding customer base, backed by strength in generative AI, is expected to aid the performance of Google Cloud in the near term as well as bolster Alphabet’s footprint in the booming cloud computing market.

In the first quarter of 2024, the segment reported revenues of $9.6 billion (11.9% of the total revenues), up 28.4% year over year.

Strengthening the Google Cloud segment will, in turn, contribute well to the overall performance of Alphabet.

The Zacks Consensus Estimate for 2024 revenues is pegged at $295.53 billion, which indicates year-over-year growth of 15.2%. The same for 2024 earnings stands at $7.60 per share, which implies year-over-year growth of 31%. The EPS estimate has moved north by 0.4% over the past 30 days.

With the growing generative AI capabilities in the cloud, the largest cloud provider will be able to narrow down its gap from its strong peers like Amazon AMZN and Microsoft MSFT, the cloud giant and the second largest cloud player, respectively.

Both Amazon and Microsoft are making concerted efforts to bolster their generative AI solutions in order to expand their cloud footprint.

In the first quarter of 2024, Amazon Web Services accounted for 31% of the worldwide cloud provider market, per the latest Canalys data. Meanwhile, Microsoft accounted for 25% of the market with its robust Azure cloud services. Google Cloud, on the other hand, acquired 10% of the market.

Conclusion

We believe that Alphabet presents a compelling investment opportunity due to its strong market position in generative AI, search engine and cloud.

Alphabet currently sports a Zacks Rank #1 (Strong Buy) with a Growth Score of B, a combination that offers a good investment opportunity, per the Zacks proprietary methodology. You can see the complete list of today’s Zacks #1 Rank stocks here.

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