Where Will Alphabet Stock Be in 1 Year?

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) posted its second-quarter earnings on July 23. The tech giant's revenue rose 14% year over year to $84.74 billion, beating analysts' estimates by $450 million, while its earnings per share (EPS) grew 31% to $1.89 and cleared the consensus forecast by $0.04.

Those numbers were solid, but some concerns about YouTube's slowing ad sales and OpenAI's new search engine weighed down its stock. Alphabet's stock has still risen nearly 30% over the past 12 months, but can it overcome its near-term challenges and head higher over the next year?

Image source: Getty Images.

Alphabet's acceleration ends

During Q2, Alphabet generated 76% of its revenue from Google's advertising business, which handles its search and display ads, advertising network, and YouTube. Another 12% came from Google Cloud, while 11% came from its paid subscriptions, non-advertising platforms, and hardware devices. Here's how those businesses fared over the past year.

Data source: Alphabet. YOY = Year-over-year.

Google's advertising business suffered a slowdown in 2022 as rising interest rates and other macro headwinds drove many companies to purchase fewer ads. However, its growth accelerated throughout 2023 as the market's robust demand for YouTube and search-based ads offset its declining sales of network-based ads.

But that acceleration ended in Q2 as its YouTube ad sales only rose 13% year over year. That marked a significant slowdown from its 21% growth in Q1 and broadly missed analysts' expectations for 17% growth.

CFO Ruth Porat said Google was "pleased with YouTube" during the conference call and didn't offer any clear reasons for its decelerating growth. However, it could be struggling with tough competition from ByteDance's TikTok or other ad-supported, streaming-video platforms -- and it might be cannibalizing its own ad sales with YouTube's paid subscriptions.

Google's "search and other" ad revenue still rose 14% year over year, roughly matching its growth rate from the previous quarter, but that steady growth was overshadowed by OpenAI's introduction of its own generative AI search engine, SearchGPT. That announcement could generate unpredictable headwinds for Google, which has already been struggling to keep pace with OpenAI and Microsoft (NASDAQ: MSFT) in the artificial intelligence ( AI) race.

Google's subscription, platform, and devices growth also decelerated as it lapped its price hike for YouTube TV in the prior-year quarter. The only bright spot was Google Cloud, which accelerated for the third consecutive quarter as the rapid expansion of the AI market drove more companies to upgrade their cloud-infrastructure services.

Its margins are still expanding

Alphabet's revenue growth is cooling again, but its operating margin still held steady sequentially and rose 3 percentage points year over year to 32% in Q2. That expansion was largely driven by its layoffs and other cost-cutting measures, but those strategies could inadvertently throttle its growth by capping its investments.

That's why Alphabet is such a polarizing stock. The bulls will point out that it's focusing on expanding its margins, repurchasing more shares through its new $70 billion buyback plan, and finally paying out dividends. The bears will tell you that all of those moves indicate its business is maturing and running out of room to grow.

So where will Alphabet's stock be in a year?

From 2023 to 2026, analysts expect Alphabet's revenue and net income to grow at a compound annual growth rate (CAGR) of 12% and 20%, respectively. Those growth rates are steady, and its stock still looks reasonably valued at 22 times forward earnings. Its forward yield of 0.5% seems paltry, but its low payout ratio of 3% gives it plenty of room for future dividend hikes.

Assuming Alphabet matches analysts' expectations and its forward valuations hold steady, its stock could rise more than 30% by the end of 2025. But if YouTube's ad sales continue to cool and it struggles to counter Microsoft and OpenAI in the AI market, its stock could be revalued as a mature blue chip tech stock instead of a growth stock. If that happens, we could see its stock flatline or decline over the next 12 months.

I think Alphabet's multiple could dip over the next year as it grapples with those challenges, but I don't think it will become a value stock anytime soon. Even with a lower forward multiple of 18, it could rise to $180 as it streamlines its business and widens its moat against its advertising, AI, and cloud challengers. It probably won't dazzle the bulls and generate market-beating gains over the next few quarters, but it might still be a stable long-term play for patient investors.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy .