Why We’re Sticking to Our Price Target as Shares of This Big Tech Holding Move Higher

Our shares of Alphabet GOOGL are moving higher on Wednesday morning, propelled by the company’s across-the-board better-than-expected September quarter results that culminated in consensus-topping revenue and EPS. Those results are leading to a rash of price target increases across Wall Street with those revised figures bookending our pre-existing $210 target.

While those moves are made, the prospect of little margin improvement in the near term means we’ll keep our price target intact. As Alphabet continues to benefit from AI adoption and moves from investing to harvesting its AI investments, which should bring eventual margin improvement, we’ll revisit our price target. Even though we are leaving our price target intact for now, we continue to see the company benefitting as AI adoption continues both in and outside of Google.

Breaking Down Alphabet’s Quarter

Revenue for the bread-and-butter Google Advertising business rose more than 10% year over year, while Google Cloud revenue accelerated, rising 35% year over year in the September quarter from 28% to 29% in the prior two quarters. Sequentially, Google Cloud revenue rose 10%, making it one of the fastest-growing businesses given the overall September quarter revenue increase of 2% compared to the June quarter.

The eye-catching item here was that despite all of the concern over AI and companies monetizing their investment, operating margins at Google Cloud rose to 17% from roughly 11% in the June quarter and were up far more compared to year-ago levels. That’s the good news. The not-so-good news is that, compared to the June quarter, Alphabet’s overall operating margin of 32% was flat. Perhaps we’re nitpicking too much, but that 32% level was also unchanged compared to Alphabet’s March 2024 quarter. What this means is, despite the overall revenue increase of 10% comparing the September 2024 and March 2024 quarters, Alphabet’s operating margin hasn’t budged.

It also hasn’t fallen despite AI investing and the lower margin Google Cloud business becoming a larger part of the revenue mix, almost 13% in the September 2024 quarter versus 11% in the year-ago quarter. That tells us that as fast as Google Cloud is growing thanks to AI leading to 30% greater product adoption, Google advertising is no slouch. Google Search continued to post nice revenue gains year over year, erasing concerns of search engine market share shifts, but YouTube Ads revenue continued to grow double-digits putting its trailing four-quarter revenue over $50 billion.

Those flat operating margins over the last few quarters despite rising investment levels also tell us that management cost-cutting efforts across optimization efforts for headcount as well as the company’s physical footprint and other rationalizations are bearing fruit. The odds of meaningful margin expansion in the near term are likely going to be held in check by higher investment levels in the coming quarters, which should benefit our Nvidia NVDA and Marvell MRVL shares.

There is also the fade, especially at YouTube, of election-related ad spend in November and December compared to the September quarter and October. That revenue fade also suggests Google Cloud’s piece of the overall revenue mix should creep higher as well. While that business is making great strides with its margins, at 17% they are well below the 40% operating margins at Google Services.

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