Ask Google’s
Let's dive into Alphabet’s worthiness as an investment, starting with the company’s valuation, factors driving growth, risks to watch and key metrics.
Alphabet’s Market Valuation
Alphabet’s stock price at close of trading on May 28 was $178.02, equating to a market capitalization above $2.19 trillion. There are only four U.S. public companies that eclipse a $2 trillion value: Microsoft
Within that elite group, Alphabet has the lowest forward P/E ratio at 23.53. Microsoft’s P/E is 32.26, Apple's is 28.99 and Nvidia’s is 41.49. Alphabet also has the lowest price-to-sales and price-to-book ratios among these peers. By themselves, these ratios imply an unusual opportunity—one of the world’s most powerful and iconic technology companies may be trading at a reasonable price.
Other data corroborates this conclusion. Simply Wall St recently published a valuation of Alphabet using a discounted cash flow (DCF) model. The DCF method estimates a company's future cash flows and then adjusts those cash flows to reflect their current value. Since the math is heavily influenced by assumptions, the output is considered an indicator rather than a prediction. In this case, the analysis indicated that GOOG stock is undervalued by about 17%.
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Factors Driving Google’s Growth
Alongside a potentially attractive price point, Alphabet also has business momentum. In the first quarter of 2024, the company delivered a 25% positive earnings surprise, driven by double-digit revenue growth and a 7-point gain in operating margin versus the prior-year quarter. Growth drivers include:
- Double-digit revenue growth in multiple units. Quarter-over-quarter revenue from Search grew 14%. YouTube ad revenues rose nearly 21% and Google Cloud turned in a 28% revenue upgrade.
- Cost cutting. Google has been trimming its expense structure with layoffs and other cost-saving measures since last year. Those efforts contributed to growth in Alphabet's operating margin to 32% from 25%.
- AI innovation. Alphabet is making a play in AI. The company is investing in AI-capable hardware and AI features for its Google Search and Google Workspace products.
- Infrastructure leadership. Google has ample computing power necessary to support its AI strategy. The company's data center network is among the world's best in terms of performance and security.
Potential Risks And Challenges For Alphabet
Unfortunately, business momentum isn’t the whole story for Alphabet. The company has a brewing image problem related to the Google businesses. Two pending antitrust lawsuits, plus negative headlines regarding business practices could chip away at Google’s dominance in search and online advertising. Five stories to watch are below.
- The Department of Justice (DoJ) alleges Google abused its power to ensure it remains the world’s preferred search engine. The case has been heard and the judge is expected to make a ruling in late summer or early fall. If the judge rules against Google, a second trial will be held to determine a remedy. The case revealed that Google spends some $20 billion annually to secure default search engine status on several devices and browsers. This is more than Google spends each year on improving its search results.
- In a separate case, the DoJ and several states allege that Google has illegally stifled competition in digital advertising. A jury trial is slated for September. The suggested remedy is a forced sale of the company’s ad manager suite.
- Google executives admitted in 2023 to manipulating advertising prices to meet sales goals. Google’s advertising system is supposed to be auction-based, with prices determined by supply and demand. The leadership team had previously denied any intervention in ad pricing.
- Recent algorithm changes at Google Search have been criticized for seemingly silencing independent publishers. The algorithm is the set of rules that dictate which websites appear in response to user queries. Critics say the changes favor generic, corporate content, which ultimately makes the internet less interesting. Affected publishers have seen their revenues plummet, which has prompted layoffs, business closures and anti-Google sentiment.
- Google Gemini has come under fire for providing inaccurate and potentially dangerous responses. Gemini is Google’s ChatGPT competitor, and it’s powering AI-generated answers to Google Search queries. Throwing itself into competition with ChatGPT is a strategy that could backfire. For Google to win this race, two things must happen. Search users must welcome the new approach and Gemini must evolve to be distinctly superior.
These headlines haven’t damaged Alphabet's earnings power—yet. But the legal issues are concerning. Even if these cases resolve in Google's favor, they may publicize additional details that could alienate advertisers and search users. If the cases don’t go Google’s way, one or both could force a fundamental change in the company's operations.
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Google Stock’s Key Metrics to Consider
By the numbers, Google stock is a well-rounded investment. The company has delivered positive earnings surprises for five consecutive quarters. It also has a diversified revenue stream, leading marketing share in key segments, a reasonable valuation and a brand-new dividend.
Those key advantages define the metrics to watch for Alphabet going forward. Investors will want to keep tabs on the company's earnings growth, market share, forward P/E ratio and dividend growth.
Earnings Growth
Alphabet has steadily grown its quarterly diluted EPS since the second half of 2022. Year-over-year earnings growth in the last four quarters has ranged from 19% to nearly 62%.
Market Share
Google has leading market share in search and online advertising, but the numbers have been shifting. According to Statcounter, the company’s search market share has ticked down from 92.8% in April 2023 to 90.9% in April 2024. Emarketer also reports a slight decline in digital ad revenue share from 27.7% in 2022 to 26.4% in 2023. Despite the share dip, Google’s ad revenue has continued to grow as advertisers spend more.
Forward P/E Ratio
While Alphabet's forward P/E ratio has ticked up in recent quarters, it remains competitive versus mega cap tech stock peers Microsoft, Amazon
Dividend Growth
Alphabet declared its first quarterly dividend of $0.20 per share in April 2024. The forward dividend yield of 0.45% is conservative, as is Alphabet’s 12% payout ratio. The dividend will likely increase going forward, potentially enough to attract a new audience of income-seeking investors.
Analyst Considerations
According to TradingView, GOOGL stock has 41 strong buy ratings, nine buy ratings, 14 hold ratings and zero sell ratings. One-year price targets range from $225 to $143. The high side of the range equates to more than 26% upside, based on a starting share price of $178.02. A decline to $143 would be a 19% slide.
Averaging those numbers gives Alphabet a buy rating with a $191.96 one-year price target, which implies 7.8% upside.
Is Google Stock A Buy?
Alphabet is an interesting investment to consider. It’s one of the largest companies in the world and one of the most deep-pocketed and formidable competitors. Earnings reports in the last year have been strong. And, analysts mostly agree GOOG has upside. But there are question marks, which undoubtedly contribute to the stock's low valuation metrics relative to peers.
Right now, GOOG is a good fit for the investor who’s looking for a value play and a bit of cash income to sweeten the deal. The caveat is that this investment requires oversight. How Google moves forward in the next two years will shape Alphabet’s future earnings power. Top priorities include resolving Google’s positioning relative to ChatGPT and quieting the chatter about unsavory business practices.
In the meantime, those lawsuits will carry on and, possibly, drag out into appeals. Should the courts rule against Google, any antitrust remedies are years away. For context, the antitrust suit against Microsoft hung around for 21 years. Alphabet has time to adjust its strategy, while investors have time to establish exit parameters.
Bottom Line
Alphabet stock is a good buy on paper, but the company has some baggage. That’s not an unusual scenario, so it’s a good opportunity to let your investment priorities guide you. If you can handle some bad press for the right price, GOOG stock may fit nicely into your portfolio.
Frequently Asked Questions (FAQs)
What factors contribute to Google’s market valuation?
Key indicators imply that Google may be undervalued. The company’s recent growth story has been impressive, but legal issues and negative headlines may be impacting investor interest.
How does Google’s growth compare to other tech companies?
GOOG stock has gained nearly 42% in the last 12 months, outpacing Microsoft at 29% and Apple at 8.3%. Chip designer NVDA has appreciated 192% in the same timeframe, making it one of the best stocks in terms of growth.
What risks should investors consider when buying Google stock?
Investors should weigh Google’s competitive strengths alongside the risks associated with two pending antitrust suits. The company’s AI positioning and its effect on Google’s primary search engine product is also a consideration.
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The brain trust at Forbes has run the numbers, conducted the research, and done the analysis to come up with some of the best places for you to make money in 2024. Download Forbes' most popular report, 12 Stocks To Buy Now.
