What a difference a few months can make. Just a short time ago, investors were frightened by the possibility that artificial intelligence (AI) would help rivals of Alphabet (GOOGL -0.85%) (GOOG -0.78%) dismantle its throne atop the search industry.
Today, however, more people are beginning to see AI as a powerful growth driver for Alphabet, and its stock price, in turn, has surged by nearly 40% so far this year.
Yet the growth story remains in its middle innings, and many more gains could lie ahead for investors who buy its stock today. Here are three reasons.
1. YouTube is an exceptional business
Google purchased YouTube for $1.65 billion in 2006. At the time, the fast-growing video-sharing site had roughly 72 million users, up from nearly 3 million in 2005. Today, that figure is a staggering 2.7 billion, according to market intelligence company Demand Sage.
This incredible user growth enabled YouTube to earn $40 billion in revenue over the past year. With annual sales that are now more than 24 times its purchase price, it's easy to see why the popular video platform is widely considered to be one of the best acquisitions in corporate history.
New offerings, such as short-form videos of 60 seconds or less, have allowed YouTube to fend off competition from TikTok and other rivals. And You Tube remains the dominant force in the video ad industry.
Still, inflation concerns and fears of a potential recession have weighed on ad sales over the past year or so. But these macroeconomic factors are likely to prove temporary. In May, YouTube CEO Neal Mohan cited signs of stabilization, driven in part by higher travel-related spending and improving retail trends.
Looking further ahead, Demand Sage estimates that the user base will reach 2.85 billion by 2025. This should help Alphabet capture an even larger share of the global video ad market, which is forecast to expand from $177 billion in 2023 to about $230 billion by 2027, according to Statista.
2. Google's search dominance has not weakened
It's not just video ad sales that are likely to reaccelerate. The overall digital ad market will top $1 trillion by 2027, up from approximately $700 billion in 2023, according to Statista. Search advertising is expected to remain the biggest portion of this enormous industry.
Image source: Statista.
There's been a lot of hype surrounding Microsoft's partnership with ChatGPT creator OpenAI, as well as the company's plans to use artificial intelligence to wrestle away Google's market share in search. But so far there's little evidence of any significant losses for the search leader. Google still holds more than 90% of the global search market, according to Statcounter. Microsoft's Bing, on the other hand, still has less than a 3% market share.
So Alphabet remains the best way for investors to profit from the long-term growth of global internet search.
3. AI should fuel Google Cloud's growth
Artificial intelligence is more of an opportunity than a threat for Alphabet. Soaring demand for AI applications is expected to expand the cloud computing market. As a leading provider of cloud infrastructure services, the company stands to benefit from this global megatrend.
Google Cloud's revenue jumped 28% year over year to $7.5 billion in the first quarter. Better yet, Alphabet's cloud computing division achieved profitability for the first time. Google Cloud's operating income was $191 million, compared to a loss of $706 million in the prior-year period.
With the initial buildout of its cloud network now complete, Google Cloud's profit margins should continue to improve as it scales up these operations. And there's a long runway ahead. The global cloud computing market is predicted to top $1.5 trillion by 2030, up from $619 billion in 2023, according to Grand View Research.
