Boosting Our Price Target for This Big Tech Play

*We are boosting our price target on Alphabet shares to $210 from $200

*We're also connecting Google’s spending dots and why it’s positive for Nvidia and Marvell

*And we touch on ServiceNow’s upcoming earnings and why we’re focused on its AI comments

We are bumping up our price target for Alphabet GOOGL shares to $210 from $200 following the company’s June quarter results. Despite the strong operating performance of that beat-and-raise quarter, prospects for more and others boosting their GOOG price targets, the shares are being pulled lower this morning. We attribute that to the company sharing that it will continue to invest heavily after spending $13 billion in the quarter, up from $12 billion in the prior one, and expecting to spend at least another $24 billion in 2H 2024.

That’s above market expectations and it is fueling questions about the level of investment versus the expected payoff in an increasingly competitive environment. We can understand that thinking given that Google Services — which includes search and advertising, the company’s bread and butter business — still accounted for more than 87% of its $84.7 billion in June quarter revenue. Google Cloud, which grew 29% year over year in the quarter and 8% sequentially, accounted for 12% of revenue.

But what folks are potentially missing is the margin expansion posted at both Google Services and Google Cloud. During the June quarter, the operating margin at Google Services climbed to just over 40%, up meaningfully from 35.4% in the year-ago quarter. But the bigger increase was the 640 basis points one at Google Cloud. Exiting the June quarter, the operating margin for that business was 11.3%. Clearly, the company’s efforts to trim costs while growing revenue are paying off, allowing it to invest in the future.

Because we are still in the relatively early innings when it comes to AI revenue generation, we will be patient with Alphabet and GOOGL shares. We continue to see it well positioned, given its treasure trove of data across its search, advertising and YouTube businesses, ones that should benefit in the coming months from an upswing in digital advertising. As AI matures, we see it bringing further lift to Google Cloud’s revenue and profit generation.

With the next level of support for GOOGL shares at $165, should the shares find their way to that level and successfully test it, that would be a nice place for newer members to pick up some shares.

Connecting Google’s Spending Dots

Stepping back, we are likely to see other Big Tech players, including Amazon AMZN and Microsoft MSFT, join Alphabet in continuing to invest at elevated levels. We’ve shared expectations that Microsoft will look to double its Cloud business to over $200 billion in the coming years, and odds are Amazon isn’t going to sit on the sidelines letting its lunch get eaten.

Based on what we’re seeing on Wednesday morning, such revelations or affirmations may not go over all that well with Wall Street but that level of spending bodes very well for our positions in Nvidia NVDA and Marvell MRVL. While the portfolio has a relatively full position in NVDA and MRVL shares, should we see them move considerably lower it may give us some room to pick up a few more shares for the portfolio.

ServiceNow’s Upcoming Earnings

When ServiceNow NOW reports after Wednesday's market close, one of the areas we’ll be focusing on is its comments about AI adoption and related price lift realization. As you know, the shares exploded higher soon after we initiated our position in early June. Those shares have been a nice contributor to the portfolio, and we would welcome the opportunity to expand the position size.

While we would love to pick up more near the position’s $662.65 cost basis, odds are that’s not going to be in the cards. As we digest the company’s quarterly results, we’ll keep an eye on key support levels at $740 to $745 and again at $714.

More Pro Portfolio:

At the time of publication, TheStreet Pro Portfolio was long GOOGL, AMZN, MSFT, NVDA, MRVL and NOW.