Alphabet‘s (GOOGL 2.46%) (GOOG 2.47%) latest financial results (for Q2 2023 ended June 30) easily crushed Wall Street consensus estimates. The business reported revenue of $74.6 billion (up 7% year over year) and diluted earnings per share of $1.44 (up 19%).
That strong fundamental performance helps explain why the stock is up 47% this year. But there could be more gains ahead. As August comes to a close, investors should be buying this top FAANG stock hand over first. Here are three reasons why.
Strong financial position
As is the case with many of its FAANG peers, Alphabet is on strong financial footing right now. As of June 30, the company had $118 billion of cash, cash equivalents, and marketable securities on its balance sheet, with under $14 billion of long-term debt. Most businesses dream about having a massive net cash position like that.
And during the first six months of 2023, Alphabet was able to generate almost $40 billion of free cash flow thanks to its highly profitable operations. Because the company’s capital expenditures usually only account for less than 10% of overall revenue, the business is a money-making machine.
In uncertain times like the one we’re in, where the possibility of a recession is still a real threat thanks to interest rates that have risen quickly, investors might want to prioritize owning companies that are in sound financial positions. Alphabet passes this test with flying colors. Should a severe economic downturn happen, I don’t think there’s any worry that this business will make it through without any issues. A valid argument can be made that Alphabet will become stronger, particularly as smaller rivals struggle to survive.
Leader in artificial intelligence
Since the launch of ChatGPT in November 2022, no topic has garnered more attention than artificial intelligence (AI). While businesses scramble to find ways of integrating the technology into their operations, and investors look to profit from the trend, regulators are trying to figure out how to police the rapidly changing environment. It’s certainly an exciting time.
Investors might be tempted to ignore Alphabet and direct their capital toward younger, more speculative AI stocks. But this would be missing the point, while also potentially adding more risk to a portfolio because of how unproven these earlier-stage companies might be.
Sundar Pichai has made AI a top focus for Google since he became the CEO in 2015. That position proves that Alphabet isn’t behind in the AI wars. On the contrary, this company has long been a leader in the space. AI permeates across various products like Search, Maps, Gmail, Google Cloud, and YouTube.
And at a recent developer conference, Pichai revealed what other AI initiatives the company has planned. Generative search, more immersive views in Maps, and improved photo editing are a few examples.
Thanks to its superb financial position, which I discussed above, coupled with the company’s massive scale, it’s easy to be bullish on Alphabet’s capabilities. It has the capital and technological resources to continue investing heavily in AI.
For a business that is one of the leaders in digital advertising, cloud computing, and streaming entertainment, as well as one that is undoubtedly at the forefront of AI innovations, Alphabet’s stock is surprisingly inexpensive right now. Shares currently trade at a forward price-to-earnings ratio of 23.2. That’s a notable discount to the tech-heavy Nasdaq 100 Index’s multiple of 27.2, meaning that Alphabet is cheaper right now than the average of most of its peers. That seems unwarranted to me.
This is a truly dominant business with a lot of expansionary potential. The industries it operates in should register meaningful growth in the decade ahead, a trend that will benefit Alphabet tremendously.
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