Subscribe for Free Weekly Stock Analysis

Beth's analysis helps drive decisions for a top-performing tech portfolio.

Blogs -Alphabet Stock: Search Giant Is Just Getting Started

Alphabet Stock: Search Giant Is Just Getting Started


August 16, 2023

author

Beth Kindig

Lead Tech Analyst

This article was originally published on Forbes on Aug 10, 2023,07:15 am EDT

Given the macro headwinds, not many investors expected the magnitude of the Nasdaq-100’s rally through the first six months of 2023. Going into this year, we were positioned for bottom-line focused investment themes that we felt would be able to deliver earnings growth due to secular demand for its products, and in some cases, be able to reduce costs to maintain profitability.

Big Tech versus Tech Sector earnings

Below is an analysis of consensus earnings estimates from Zack’s on Q2 Technology Sector earnings trends through July 26 plus expectations for the next three calendar quarters.

For the past three quarters, sales and earnings have declined on a year-over-year basis. However, there appears to be stabilization as year-over-year comps get easier and the market is estimating a modest resumption of growth in Q3 and an acceleration in Q4 to Q124.

Tech Sector Quarterly Growth Rates

Meanwhile, Zack’s looked at the earnings picture for the “Big 7 Tech Players” - Microsoft, Alphabet, Meta, Nvidia, Apple, Tesla and Amazon. The earnings profile for the Big 7 is estimated to be more robust compared to the overall technology sector.

Big 7 Tech Players - Quarterly Earnings and Revenue Growth (YoY)

In addition to a better earnings profile, Big Tech prices and valuations have benefited from other factors that investors are seeking

  • Focus on their AI capability and having the financial resources to make the required investments so that they make a positive contribution to future earnings.
  • Company size (i.e. large cap) and the ability to manage margins in the face of macro headwinds by meaningfully reducing costs but not at the expense of critical high ROI investments.
  • Credit quality - following Fitch Ratings’ downgrade of U.S. government debt to AA+. Big Tech Credit worthiness is on par if not greater than US debt. For example, Alphabet has the same AA+ rating.

Amongst the Big 7, we believe Alphabet stands out for several reasons:

Sign up for I/O Fund's free newsletter with gains of up to 221% - Click here

Year of Execution - Alphabet

Beginning in mid-2022, IO Fund began to transition allocation toward larger cap tech stocks because we felt they are in a better position to navigate a macro downturn. Big Tech has levers at its disposal to manage its margins by rightsizing its cost base. Importantly, at the same time they have the financial strength to make the investments required to capitalize on the AI opportunity and take market share from its weaker competitors. The medium-term bull case is that once revenue begins to meaningfully reaccelerate helped by its AI offerings, the combination of optimizing its cost structure and efficiencies garnered from technology investments leads to expanding margins. This is similar to Meta and its “Year of Efficiency”.

At the moment we prefer Alphabet (GOOGL) over Meta (META). We see a similar story playing out for Alphabet and its “Year of Execution”. We believe it’s in an earlier stage than Meta in its self-help process and its core business areas are just now showing signs of stabilization. Alphabet’s margins are beginning to rebound and have now returned to the percentage they were at in Q1 2022. Meanwhile 1) Resilience in Search, 2) stabilization in YouTube Ads, 3) Market share and profitability gains in Cloud and 4) Growth in Other Google (i.e. YouTube subscription) make us optimistic that revenue will accelerate and there is upside to margins for the remainder of the year.

In the recent Q223 earnings call, management commented on the QoQ strength in margins: “A quick comment on the sequential improvement in operating margins in the second quarter. There are two factors to note. First, the benefit from an acceleration in search advertising revenue growth in the second quarter. Second, the vast majority of the charges related to our workforce reduction and optimization of our global office space were taken in Q1.”

Every Thursday at 4:30 pm Eastern, the I/O Fund team holds a webinar for premium members to discuss how to navigate the broad market, as well as various stock entries and exits. We offer trade alerts plus an automated hedging signal. The I/O Fund team is one of the only audited portfolios available to individual investors. Learn more here.

Search moat is strong

For all the hoopla surrounding ChatGPT and the belief that it will provide MSFT an opportunity to take share from Alphabet’s core search business, it has yet to happen according to Search Engine. According to their analysis, Microsoft is losing market share. It peaked at 9.92% in October 2022 and is now at 7.14%. With its market position firmly entrenched, Alphabet has the audience to roll out its Search Generative Experience (SGE). On its own, the Search business has proved resilient because it provides advertisers an attractive ROI on their ad spend. Looking ahead, SGE will improve advertisers’ ROI and will likely provide Alphabet additional pricing power. This will also improve their retail vertical. Meanwhile, consumer interest will further strengthen Alphabet’s dominant market position in Search.

However, let’s not forget about anti-trust trial

One of the reason we’re very positive on the AI potential for Google’s businesses is that it is sitting on the world’s very best consumer data, which is not an exaggeration in the least bit. Its ability to lead in artificial intelligence and large language models should not be underestimated.

Therein lies the issue. Google undisputedly has the world’s best consumer data, but did this grow to become part and parcel with operating a monopoly? The Department of Justice has asserted anti-trust violations against Google with the trial beginning in September 2023.

We anticipate two outcomes. The antitrust outcome will be mild, and Google will be empowered to continue to dominate. Or, the outcome will require the ad properties to be broken up, leading to a weaker stance for Google. This could benefit smaller ad-tech players, which we have identified and are monitoring closely.

The I/O Fund Analyst Team contributed to this analysis

Recommended Reading:

head bg

Get a bonus for subscription!

Subscribe to our free weekly stock
analysis and receive the "AI Stock: 5
Things Nobody is Telling you" brochure
for free.

More To Explore

Newsletter

Bitcoin price chart signaling potential top despite favorable crypto news

Why Bitcoin’s Bull Run May Be Nearing a Top Despite Pro-Crypto Tailwinds

Since calling the Bitcoin bottom near $16,000 in late 2022, the I/O Fund has maintained a disciplined, contrarian approach — issuing 13 buy alerts before Bitcoin surged above $100,000. Now, signs sugg

May 09, 2025
S&P 500 hits key 2025 target as bond market and consumer trends signal rising volatility and shifting stock-bond correlation.

2025 Market Outlook: Why Stocks and Bonds Are Signaling More Volatility

As the S&P 500 reaches a key bounce target, troubling signs in bonds and consumer behavior suggest this market rally may be on thin ice. I/O Fund’s Knox Ridley explains why volatility may intensify an

May 02, 2025
Illustration of an investor holding an umbrella, shielding from stock market volatility.

The Impact of Tariffs on the Stock Market: Q1 Preview

Rising tariffs are injecting significant uncertainty into the stock market, triggering daily volatility and forcing analysts to revise earnings estimates. Our Q1 preview dives into the potential impac

April 25, 2025
Aerial view of Tesla's new Model Y Juniper parked in lines. Courtesy of Tesla, Inc.

Tesla Stock Faces Recalibration of Growth Expectations

Tesla’s stock is now facing a recalibration of expectations after Q1’s delivery report missed by a wide margin. Q1’s analyst consensus has gone from $25.98B at the start of the year to $23.97B in earl

April 17, 2025
an illustration of a government building, constrained by heavy chains, with a volatile stock chart displayed above.

The Fed Can’t Save This One: Why Bonds May Break the Stock Market in 2025

In early 2025, as markets rallied to new highs, we warned that divergence across key sectors signaled a looming correction. Now, with all major indexes in a technical bear market and bond market dysfu

April 11, 2025
Silhouette illustration of Larry Ellison, Oracle's CTO and executive chairman.

Oracle Stock Outlook: Revenue Could Double by FY2029, yet Targets Seem Lofty

Late in 2024, Oracle outlined an ambitious plan to nearly double its revenue by fiscal 2029, hinging on long-term growth in enterprise AI and cloud spending. Oracle sets itself apart from its hypersca

April 04, 2025
Graphic showing I/O Fund's "210% Cumulative Returns" with financial charts and a world map in the background.

I/O Fund Reports 210% Cumulative Return -- Ranking Above Wall Street's Best

In 2024, I/O Fund posted a 35% return, significantly outperforming popular tech ETFs, which recorded an 8% return over the same period. On a cumulative basis, the results translate to a remarkable 219

March 31, 2025
Illustration of an investor burdened by the weight of market downturn

The Harsh Truth: Retail Investors Take the Brunt of Market Losses

Retail investors face significant disadvantages in the stock market, often underperforming institutional investors by a wide margin. Studies show that high-frequency trading firms dominate market acti

March 28, 2025
Illustration of a futuristic AI data center featuring NVIDIA’s GB200 Superchip

NVIDIA’s GB200s for up to 27 Trillion Parameter Models: Scaling Next-Gen AI Superclusters

Supercomputers and advanced AI data centers are driving the AI revolution, enabling breakthroughs in deep learning and large-scale model training. As AI workloads become increasingly complex, next-gen

March 21, 2025
illustration of NVIDIA Blackwell Ultra chip with a glowing AI brain above it.

NVIDIA Blackwell Ultra Fuels AI & HPC Innovation, Efficiency and Capability  

NVIDIA’s latest Blackwell Ultra GPU, unveiled at NVIDIA GTC 2025, is transforming AI acceleration and high-performance computing (HPC). Designed for the “Age of Reasoning,” these cutting-edge GPUs del

March 21, 2025
newsletter

Sign up for Analysis on
the Best Tech Stocks

https://bethtechnology.cdn.prismic.io/bethtechnology/e0a8f1ff-95b9-432c-a819-369b491ce051_Logo_Final_Transparent_IOFUND.svg
The I/O Fund specializes in tech growth stocks and offers in-depth research for Premium Members. Investors get access to a transparent portfolio, a forum, webinars, and real-time trade notifications. Sign up for Premium.

We are on social networks


Copyright © 2010 - 2025