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Written by Sean Williams for The Motley Fool->
Alphabet has closed the gap with Nvidia and is within striking distance of becoming Wall Street's most valuable company.
With the exception of Apple, no company has repurchased more of its common stock than Google's parent, Alphabet.
Although artificial intelligence (AI) is the future for Alphabet, share buybacks have been foundational to its success.
For years, the two hottest things on Wall Street have been the rise of artificial intelligence (AI) and Nvidia. However, the tide has begun to shift, and Google's parent, Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG), now finds itself in the spotlight.
Following the release of its first-quarter operating results last week, Alphabet is roughly $150 billion in market cap away from becoming the most valuable public company. While AI has played an important role in lifting Alphabet's long-term growth prospects, there's another catalyst that's arguably been even more foundational to its 1,000% run-up (including dividends) over the trailing decade.
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With the exception of Apple, no company has spent more to repurchase its own stock than Alphabet. The parent company of Google, YouTube, and Google Cloud, among other ventures, has spent more than $346 billion since the start of 2016 on share buybacks:
Even though Alphabet didn't repurchase any shares during its latest quarter, the $346 billion spent to buy back its common stock has reduced its outstanding share count by approximately 13%. If it hadn't bought back 180 million shares over the last decade, its full-year earnings per share (EPS) last year would have been closer to $9.50 instead of a reported $10.81.
$GOOGL After 7 years of buybacks and a 13% reduction in share count, Alphabet has returned its share count to levels last seen in 2006. pic.twitter.com/1Sba6zF34b
For companies with steady or growing net income, buybacks increase EPS and can make shares more fundamentally attractive to value-seeking investors.
Alphabet has also benefited from President Donald Trump's Tax Cuts and Jobs Act. This flagship tax and spending law, which the president signed in December 2017, permanently lowered the peak marginal corporate income tax rate to 21%. Retaining more of its earnings has allowed Alphabet to be aggressive with its share buybacks.
While a bountiful share repurchase program has been instrumental in Alphabet's 1,000% rally over the trailing decade, artificial intelligence is the company's future.
Make no mistake, Google is still a virtual monopoly in internet search, and YouTube is the second-most-visited social site behind Google. Alphabet's ad pricing power is going to remain incredibly strong for the foreseeable future.
But in terms of juicier margins and cash flow generation, the integration of generative AI and large language model capabilities into Google Cloud is what can shift Alphabet's growth engine into another gear. During the recently ended quarter, Google Cloud topped $20 billion in sales for the first time, delivering year-over-year revenue growth of 63%!
What's more, Alphabet closed out March with $126.8 billion in cash and cash equivalents, and generated $45.8 billion in net cash from its operations. It has more than enough capital to pay a dividend, repurchase its stock, and invest in an AI- and cloud-driven future.
The next act in the Alphabet growth story is just getting started.
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Sean Williams has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Apple, and Nvidia. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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