Alphabet stock (NASDAQ: GOOG) has been in the news lately, with the Department of Justice suggesting the sale of Google Chrome, and sharing data with rivals, among other measures to end its monopoly. The judge has set the trial on proposals for April 2025. Google will be given a chance to present its own proposals in December. [1] It was known that Google is facing antitrust cases and the remedies could be as extreme as selling the android platform. This overhang has also weighed on GOOG stock performance lately. Looking at a slightly longer period, GOOG stock has seen a 23% rise from levels of $144 in early 2022 to $177 now. This can primarily be attributed to:
- a 32% rise in the company’s revenue from $258 billion in 2021 to $340 billion now; and
- an 8% fall in total shares outstanding, thanks to $171 billion the company spent on share repurchases; partly offset by
- a 14% decline in the company’s P/S ratio to 6.5x now, versus 7.6x in 2021, due to investors’ concerns about the antitrust case against Google.
What Drove Google’s Revenues?
Google’s revenue growth over the recent years has been driven by its cloud business, which is seeing a strong momentum, with the segment sales surging a solid 72% between 2021 and 2023. However, its contribution of 11% to the company’s total sales is much smaller than 56% for its Google search business. The core search business is also doing well, with the company’s AI integration helping it to garner higher advertising revenues, a trend expected to continue in the near term.
Looking at the latest quarter, Google’s revenue of $88.3 billion in Q3 reflected a 15% y-o-y gain. The growth was led by its cloud business, with segment sales up a solid 35% to $11.4 billion. Google search revenue was up 12% to $49.4 billion, and YouTube ad revenue was also up 12% to $8.9 billion y-o-y. The company’s self-driving car unit — Waymo — is now seeing 150,000 weekly paid rides. Waymo could be the next big thing for Google. See how Waymo could be worth $5 trillion.
Not only did the company see strong revenue growth, its profitability has improved. Alphabet’s operating income rose 34% from $79 billion in 2021 to $105 billion now. Its operating margin has improved slightly from 30.6% in 2021 to 30.9% in the last twelve months.
Does Google Stock Have Upside?
With 26% gains this year, GOOG stock has fared marginally better than the broader S&P500 index, up 24%. However, the increase in GOOG stock over the recent years has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 65% in 2021, -39% in 2022, and 59% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment around rate cuts and Google’s antitrust case, could GOOG face a similar situation as it did in 2022 and underperform the S&P over the next 12 months — or will it see a strong jump? From a valuation perspective, we think its stock price appears to be fairly priced. We estimate Google’s valuation to be $182 per share, broadly aligning with its current levels of $178. Our forecast is based on 23x expected earnings of $8.05 per share in 2024. The 23x figure is higher than the stock’s average P/E ratio of 18x seen over the last three years. GOOG stock is trading at a multiple lower than some of its peers, with META trading at 25x and AMZN at 40x forward expected earnings. That is because there remains a key risk for Alphabet.
Google is facing antitrust cases, alleging the company to monopolize the marketplace and the general search services. The remedies could include a breakup of the company, regulatory oversight, and restrictions on businesses, among others. Now, Google has a monopoly with 90% of searches. The recent argument by prosecutors focused on the company’s search engine – Chrome – which is a widely used browser with over 3 billion users. Chrome is very important for Google, given that it acts as a gateway through which users access the search engine. The web browser alone could be worth as much as $20 billion. [2] Furthermore, the prosecutors stated that Google should share data it gathers from users with competitors. And, if the remedies fail to increase the competition, then Google should consider selling Android.
None of these remedies would bode well for Alphabet’s businesses in the long term. As such, despite a strong growth visibility in the cloud business, on the back of AI demand, and continued ad revenue gains, we think that the stock may not see any meaningful growth in the near term. Separately, check out Could Upstart Stock Double From Here?
While GOOG stock looks like it is appropriately priced, it is helpful to see how Google’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
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