• Alphabet reports earnings after market close on January 30

• Forecasts point to double-digit revenue and earnings growth

• Despite its latest rally, stock remains cheap against tech clan

Not great, not terrible

Alphabet had a fantastic 2023, while the stock has started the new year in buoyant form as the hype around Artificial Intelligence (AI) stocks shows no signs of easing. Despite its leading position in the tech sphere, Google’s parent company has failed to outperform the tech-heavy Nasdaq 100 in the past year, with investors probably anticipating more initiatives on the AI front.

There is no doubt that Alphabet has started some aggressive spending on the R&D of AI-related projects, which have already begun to come to fruition with the launch of Gemini generative AI model in December. Although gains from this product will not show up in the upcoming earnings report, it endorses Alphabet’s intention to ride the AI wave.

However, there is a risk that in order to adhere to investor calls for a swift rotation towards AI products, Alphabet could harm its established dominance in other operating sectors such as advertising.

Solid advertising and cloud business

Alphabet’s main cash generating machine, advertising, had a very tough start to the year as markets were pricing in an impending global recession. However, as the base case scenario shifted to a soft landing for the US economy, Alphabet’s ad business quickly picked up, with analysts projecting an 11.6% annual revenue increase in the fourth quarter.

Meanwhile, more and more businesses have started relying on cloud services, which is another important growth lever for Alphabet. Despite lagging against its peers in the cloud business, Alphabet’s cloud division is anticipated to grow 12% year-on-year.

On the operational side, Alphabet has already laid off 1,000 employees in January, while the CEO Sundar Pichai stated that there are more tough choices to be made.

Spectacular quarter

A solid fourth quarter performance is foreseen for Alphabet as the tech giant is set to post revenue of $85.27 billion, according to consensus estimates by Refinitiv IBES, which would represent a year-on-year growth of 12.14%. Aligned with the latter, earnings per share (EPS) are estimated to increase by a stunning 51.40% on an annual basis to $1.59.

Attractive valuation

From a valuation perspective, Alphabet is trading at a discount to the tech-heavy Nasdaq probably due to the firm’s lagging position in the AI race. Interestingly though, Alphabet’s Price-to-Earnings ratio is currently standing at 21.7, below its five-year average of 23.9. Therefore, combining its strong fundamentals with the relatively cheap valuation, Alphabet’s stock could be considered a bargain at current levels.

Undoubtedly, Alphabet is one of the leading tech companies with strong and stable income streams, but it just appears to be lacking the AI premium as its investments in the sector have not yet provided concrete results.

New record high in sight?

With all major US stock indices at fresh all-time high levels, it seems strange that a tech giant like Alphabet has yet to post a new record peak. Alphabet’s stock has been developing within a bullish channel since the beginning of 2023 and is currently trading in striking distance from its all-time high ahead of Q4 earnings report.

Therefore, a positive earnings surprise could bring the all-time high of $151.55 under scrutiny, whereas downbeat financials might shift the spotlight towards the January support of $135.50.