Why Alphabet could help power the market higher in the second half.
The first half of 2024 has been a strong one for the stock market, and the clear leader driving that growth has been Nvidia (NVDA 0.61%). The stock of the chipmaker has been on a meteoric rise over the past five years and that momentum continued into the first half of 2024 with the stock up over 150%.
With the first half of the year now behind us, though, it is time to look for a stock that can potentially help power the market higher in the second half. One candidate is Alphabet (GOOGL 0.46%) (GOOG 0.58%).
All about AI
The biggest trend in the market in the first half of 2024 was clearly artificial intelligence (AI). Not long ago considered a nascent technology, AI certainly hit the mainstream early this year with numerous tech companies beginning to offer AI-powered features in their products.
The biggest early beneficiary of this technological shift has been Nvidia, whose graphic processing units (GPUs) are used to build out the infrastructure needed to run AI training and inference. With AI taking off and companies rushing to introduce AI solutions, demand for Nvidia chips has outstripped supply as the company has worked with its manufacturing partners to expand production capacity quickly.
This has led to explosive growth from the company to start the year, with its first-quarter revenue soaring 262% to $26 billion.
Why Alphabet could lead the market higher
AI infrastructure was the dominant theme in the first half of the year. But it may be Nvidia’s cloud computing customers that help lead the market higher in the second half. The three large cloud computer companies of Amazon, Microsoft, and Alphabet have all benefited from the rise of AI thus far, but they still have a lot more potential growth coming down the road.
Of the three companies, the one I like the most is Alphabet for a few reasons.
The first reason is that with the smallest cloud segment of the three, it has some of the best earnings growth potential. The cloud computing business has a lot of high fixed costs associated with it, so companies need to reach a certain level of scale before they become profitable. However, once they do, the operating leverage of the business model starts to kick in and profitability growth will outpace revenue growth.
Google Cloud just recently hit this scale and turned profitable last year. As such, the segment should see strong profitability growth in both the second half of this year as well as in future years.
Second, while there have been some kinks with the company introducing new AI overlays with its search results, there is some solid potential for the company in this area. Alphabet traditionally only served up link-based ads on about 20% of its search results and only gets paid when those links get clicks. However, the company is already testing new ad formats both with its AI overlays and well as new AI-powered formats for retailers. With 80% of its search results previously not monetized, this offers a huge potential upside in the years ahead.
Meanwhile, Alphabet is also the cheapest of the “Magnificent Seven” stocks, trading at a forward price-to-earnings (P/E) ratio of under 25. Given this, in addition to its growth prospects, the stock also has the potential to expand its multiples (which is simply when its P/E ratio and other valuation metrics move higher). That sets the stock up for a strong potential performance in the back half of this year.
While I still wouldn’t count out Nvidia as leading the market once again in the second half of the year just given how much momentum it is seeing in its business, I think Alphabet is a strong candidate to lead the market forward the rest of this year.
Luckily for investors, you don’t have to choose just one and can own both Nvidia and Alphabet. Both continue to have bright long-term futures.