The stock market has seen remarkable growth in the first six months of 2024, with one standout driving force being Nvidia. The semiconductor giant has been on an extraordinary upward trajectory for the past five years, and this momentum continued into the first half of 2024, with the stock surging over 150%.
As we turn the page on the first half of the year, attention now shifts to identifying a stock that could potentially propel the market higher in the second half. One contender that stands out is Alphabet.
The Influence of AI
A defining trend in the market during the first half of 2024 has unequivocally been artificial intelligence (AI). Once considered a burgeoning technology, AI emerged prominently at the start of this year as numerous tech companies incorporated AI-powered features into their products.
Nvidia emerged as a primary beneficiary of this technological shift, with its graphic processing units (GPUs) serving as vital components for AI training and inference infrastructure. The surge in AI adoption, coupled with companies rushing to integrate AI solutions, led to a surge in demand for Nvidia chips, outstripping supply as the company expedited production capacity expansion in collaboration with its manufacturing partners.
This skyrocketing demand catapulted the company’s first-quarter revenue, which soared by an impressive 262% to reach $26 billion.
Potential Market Leadership by Alphabet
While AI infrastructure dominated the market in the first half of the year, it could be the cloud computing customers of Nvidia that drive market growth in the second half. Among the three major cloud computing entities – Amazon, Microsoft, and Alphabet – all have reaped the benefits of the AI surge, but there are further avenues for substantial growth ahead.
Of the trio, Alphabet stands out for several reasons.
Alphabet’s cloud segment, although the smallest among the three, holds significant earnings growth potential. Cloud computing necessitates notable fixed costs, requiring companies to attain a certain scale for profitability. However, once this threshold is crossed, operating leverage within the business model amplifies, leading to profitability growth surpassing revenue growth.
Image source: Getty Images.
Moreover, despite encountering some challenges with the introduction of new AI overlays in search results, Alphabet demonstrates promise in this realm. Traditionally serving link-based ads on a mere 20% of search results, with revenue generated through clicks on these links, the company is now piloting new ad formats leveraging AI overlays and novel AI-powered formats for retailers. With 80% of search results remaining unmonetized previously, Alphabet presents substantial upside potential in the years to come.
Alphabet also boasts the distinction of being the most cost-efficient among the “Magnificent Seven” stocks, trading at a forward price-to-earnings (P/E) ratio below 25. Given its growth prospects, the stock has the potential to expand its multiples, setting the stage for robust performance in the latter part of this year.
GOOGL PE Ratio (Forward) data by YCharts
While Nvidia’s business momentum indicates the potential for continued market leadership in the latter half of the year, Alphabet emerges as a strong candidate to steer the market ahead in the upcoming months.
Investors have the opportunity to diversify their portfolios by investing in both Nvidia and Alphabet, as both companies exhibit promising long-term trajectories.
Considerations for Investing in Alphabet
Prior to investing in Alphabet, it’s essential to weigh the following:
The Motley Fool Stock Advisor analyst team recently unveiled their selection of what they believe are the 10 best stocks for investors to buy now, with Alphabet not making the cut. The identified stocks hold the potential to yield significant returns in the coming years.
Reflect on Nvidia’s inclusion in such a list on April 15, 2005 – an investment of $1,000 at that time based on the recommendation would have amounted to a remarkable $757,001!*
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