• Alphabet Inc./Google’s stock price drop after Q4 earnings indicated positive revenue and income trends have a lot to do with its “Magnificent” status.
• While it shows stable trends in all regions, Google remains dependent on ad spends at a time when macro factors indicate headwinds ahead for overall consumption.
• Google’s burning cash to catch up in the AI arms race being fought between tech giants. It will be a while before the company can display a worthy edge.

“Magnificent Seven” colossus Alphabet Inc. (NASDAQ:GOOG, NASDAQ:GOOGL) aka Google announced its Q4 earnings for 2023 on the 30th of January. Despite an uptick in overall revenues and income, the stock immediately took a tumble due to the stock missing expectations. Said expectations are rather nuanced and gain importance in the current macroeconomic/market outlook.

A Deep Trend Drilldown

Given how keenly this stock features in investor sentiment (and its massive size in most broad market indices/ETFs), the fact pattern presented in its trends merits a highly nuanced look. First off, the company’s net revenues are analyzed on a regional basis under both first- and second-order terms.

Region-wise, YoY trends in regional revenues show now single-digit growth, with EMEA and APAC at around 11-10%. The U.S. is the breadwinner for the company and alone accounts for as much as EMEA and APAC combined. Overall, the company’s geographical revenue streams have become fairly stable contributors.

Now, APAC historically registered growth far in excess of all other regions, as seen in the 1st-order estimates. The fact that this segment’s growth is now nearly on par with all other regions is noteworthy, since an “explosive growth” outlook is a key consideration for “Magnificent” status. In 1st-order terms, it can be seen that strong double-digit growth patterns have been slipping since 2022.

The 2nd-order changes (which estimate the rate of change) show no strong and sustained trends in either direction. One year’s fall is more-or-less made up in the next, with no significant impact on geographical share. This buttresses the outlook that massive growth in its present mode of business cannot be reliably expected.

A similar framework applied on the company’s Net Income reveal a somewhat similar story, albeit with additional nuance.

Overall, it can be seen that “Services” has witnessed progressive growth, thus making the burden of the other income-negative segments progressively easier to bear. It bears noting that the company’s long-in-the-making “Cloud” business is beginning to bear fruit in 2023 by finally turning weakly income-positive. Overall, its “Other Bets” (i.e., the likes of Waymo, Wing, et al) continue to consume cash. The 1st-order matrix reaffirms the dominant position occupied by “Services,” while the wild swings in the 2nd-order matrix without really changing the segment share largely mirrors the “wax-and-wane” dynamic seen in the geographical estimates.

Outside of the numbers, however, the company’s growing “corporate costs,” which includes the costs borne by layoffs, litigation, et cetera, continue to grow on an absolute basis. In 2023, the costs associated with downsizing office space in the wake of the company’s many layoffs is a dominant feature. At the same time, it also highlights a somewhat tacit admission that growth is longer a matter of personnel. What the company needs, instead, are new markets.

Alphabet remains dependent on ad spends. Advertisers are driven to spend to fulfil an outreach towards customers. However, in the region of greatest revenue contribution, i.e., the United States, overall consumer purchases are in decline. One interesting “proxy” for consumer behavior could be represented by recent events at United Parcel Service (UPS): after months of negotiations with the unions, the company announced the cutting of 12,000 jobs, followed by a warning that parcel volume is likely to decline in the first half of the year (like most of 2023) followed by an expectation of some recovery in the second half of the year. Given its dependence on ad spends in America, this is a key factor in the deflation of forward-looking sentiment.

To maintain the company’s “Magnificent” status, an “explosive growth” rationale is needed. The AI theme has been a key driver for many a stock over the past year. On the front, the company finds itself on the backfoot (at least presently).

The AI Edge

For Alphabet, any imputation of AI driving revenue will be integrated into the performance of its segments. AI’s contribution to “Services” would likely be most visible as some estimation of greater search and ad matching efficiency as well as increased buy-ins into the cloud business by enterprises. In the former, this isn’t apparent yet.

In the latter, however, Alphabet is at least one or two beats behind the likes of Microsoft (MSFT), which stated in its earnings call that Azure AI, by virtue of offering top performance for AI training and inference as well as the most diverse selection of AI accelerators – including the latest from AMD (AMD) and Nvidia (NVDA) – has again made market share advancements in this past quarter. Microsoft CEO Satya Nadella stated that Microsoft is now infusing AI across every layer of its products and services, as a result of which it is winning new customers who can unlock new benefits and productivity gains.

To combat this, Alphabet is increasingly committing more and more resources to building its own place in this burgeoning market, as evidenced by its commitment to continue to spend in larger quantities to do so; greater capex is to be expected for success against the incumbent. Alphabet’s executives, for their part, seem to be asserting that the company’s upcoming model Gemini will be more powerful than Microsoft/OpenAI-affiliated ChatGPT 4 while holding forth that delivering the “world’s most advanced, safe, and responsible AI” is now the company’s number one priority.

Whether the service offering can be deemed substantively better than that by the likes of Microsoft, of course, remains to be seen.

In Conclusion

In its present business model, Google has hit peak growth and is now entirely stable. Given the preponderance of ad spends, it can also be assumed that Alphabet Inc. has now gone from “growth champion” in investor expectations to a “bellwether” of the macroeconomic outlook.

The AI edge could be a game-changer but there’s a lot of ground to cover, especially given that other giants (and possibly some other small-yet-mighty upstarts) are deep in the fray. While it’s likely that Microsoft will be recognizing substantial revenue upticks as a result of its mostly-matured and effective AI-integrated offering from 2024 onwards, Alphabet still has a ways to go. Market share capture (if any) in this key battleground would likely be visible from 2025 onwards.

Until the dust settles, Alphabet Inc. stock can be expected to shed some of its more ambitious pricing levels: such is the plight of a “bellwether” in this economy.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I lead research at an ETP issuer that offers daily-rebalanced products in leveraged/unleveraged/inverse/inverse leveraged factors with various stocks, including some mentioned in this article, underlying them. As an issuer, we don't care how the market moves; our AUM is mostly driven by investor interest in our products.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Why Google Stock Is Dipping Despite Revenue Upticks appeared first on Up2info.com.

• Generative AI is changing the advertising landscape and poses a risk to Alphabet’s competitive advantage.
• Alphabet’s cloud business is growing but has lower margins compared to advertising.
• The margins of Alphabet may shrink in the future due to the lower margins of the fast-growing cloud segment.

The Alphabet Investment Thesis

Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) could have been a powerhouse in generative AI, but they moved too slowly, giving others the first-mover advantage. And that could really impact their revenues and margins going forward as the search landscape changes. And I really think that this could lead to problems with advertising revenue if they cannot find a way to incorporate advertising into generative AI, because the GPT competition is currently operating without ads, which many end users like.

Alphabet still has a compelling case with strong cloud growth, but will it be enough to meet shareholders’ high expectations?

How Is Generative AI Changing The Advertising Landscape And Is It A Risk?

Search remains Alphabet’s most important business, even as the cloud business grows. So major impacts to that segment would really impact the company. Much has changed with the growth of generative AI, which creates content based on the data it is trained on, as opposed to classification AI, which only looked for patterns.

But generative AI will truly improve and transform the search experience. Typically, Google results are sorted by relevance and engagement, whereas a Generative Pre-trained Transformer (‘GPT’) provides an answer that comes from multiple sources. And the advantage of GPT is that there is no scrolling and searching for the answer you are looking for, and follow-up questions are better answered. Google can also do follow-up questions, but currently on a smaller scale.

So the GPT results are currently more individualized, and a big plus is that they have no ads. While Alphabet likes to emphasize that ads are important to the user, they are also very important to Google, as this is its main source of revenue. Paid placements and links, as well as ads, are important parts of their business model. So Google wants to add high-quality ads designed specifically for generative AI.

What this could look like can be seen with Google Circle to Search, for example. You can take a picture with your phone and add a question, which is kind of like a Multisearch experience with Google Lens and generative AI. For example, if you take a picture of something you want to buy, Google can give you shopping links and the answer right there. This improves the user experience and provides useful advertising.

And a really important fact that many do not know is that Transformers, the basis for tools like ChatGPT, comes from Google Research. The neural network architecture used today was developed by Google scientists in 2017. So Alphabet has a lot of experience in this area. In fact, one could argue that they are the pioneers of generative AI, even if most people today think that OpenAI (MSFT) is.

But one can also say that Alphabet may have missed this rush a bit and other companies were able to gain the upper hand in this area. Alphabet is working in this area with its Search Generative Experience (‘SGE’) project and Google Gemini, but it looks like the competition is currently ahead. Especially the Google Gemini demo in December last year was criticized.

I firmly believe that search engines as we know them today will be transformed by generative AI. And the big question is, how will this affect the monetization of search engines? And Alphabet in particular has to find a way, because search is the segment with the best margins and the highest profits, because the cloud segment is still in its infancy and only marginally profitable.

So I see Google’s incredibly large moat potentially in jeopardy. For the first time in over 15 years, to be honest. But all moats are tested at some point. And the next generation may grow up with other companies that they use primarily to gather information. For now, GPTs have a long way to go to improve the quality of their results, but they are making rapid progress.

Maybe in 10 years people will no longer say let’s Google it, but lets GPT it.

ROIC And Capital Allocation

Alphabet’s chart in terms of shares outstanding is a pleasing one. They do have a lot of SBC costs, which are also rising, but the buybacks are significantly higher. SBC’s expenses for the first 9 months were $16,801 million, up from $14,889 a year ago, but buybacks were $45,313 million. So Alphabet is one of the few software companies where the buybacks are really making a difference and not just offsetting the dilution from SBC.

And Alphabet has said they want to use SBC to keep the best AI specialists, and they certainly have the money to do that. Plus, existing shareholders don’t have to worry about much dilution, even if the comps are in the 7-digit range, as we have seen in the last picture, because the buybacks are huge.

Alphabet’s ROIC is also excellent at 24.31%, with a very low cost of capital. Their investments yield a very positive return, and this has been reflected in the stock price over the past decade.

Alphabet’s Reverse DCF

A big part of my valuation process is looking at what the market is pricing in. And if we take the TTM diluted EPS of $5.21, we can see that the market is pricing in a little over 11% compound annual growth rate for Alphabet over the next 10 years.

Historically, Alphabet beats that with a 10Y EPS CAGR of 18.92%, but the landscape has changed and Google’s biggest competitive advantage is really in jeopardy for the first time.

While the cloud business is growing and will drive revenue growth, margins are currently well below advertising. Clearly, they will improve over time, but can they reach levels similar to those in advertising?

What could EPS look like in 5 years?

If we look at the revenue for the first 9 months of 2023, we get the following revenue figure: Google Services – $196,232 million and Google Cloud – $23,896 million. Google Cloud surpassed YouTube Ads, Google Network and Google Other to become the second-largest division after Google Search & Other.

But the problem is the operating margin. Google Services made $69,128 million in operating income, which is a margin of ~35%, but Google Cloud only made $852 million, which is a margin of ~3.5%.

If your fastest-growing segment has by far the worst margins, the margins of all of Alphabet will most likely shrink over the next few years as a result. But we have to note that in the first nine months of 2022, cloud operating income was negative, and now it’s slightly positive. This is a positive trend. But it will be interesting to see how the margins evolve, because the competition in the cloud industry is fierce.

The estimates represent a CAGR of approximately 17% from $5.74 to $12.53. This is higher than what the market is pricing in, but I think the estimates are a bit high because I think the margins will suffer, and therefore I think a lower EPS in December 2028 is more likely. I think a number between $9.5 and $10 is realistic. This would put the stock at around $237.5 to $250 at a 25x multiple.

But cloud combined with AI is really in its infancy, and Google Cloud has a better cost per IOPS for disk volume and is faster and has fewer hours of downtime than the competition. So Alphabet has a competitive advantage in this segment, which can translate into better margins going forward.

Conclusion

Most of the time, the market is right, and if we compare Alphabet to the rest of the Magnificent Seven, we can clearly see that the others are trading at a premium. So the market is also seeing some trends that could be unfavorable for Alphabet.

Alphabet could have been the clear leader in generative AI if it had better leveraged its outstanding research and development. So now they are behind in what was first developed in their labs. This is not a good look.

Nevertheless, Google is still a very strong company that is relatively fairly valued and will continue to grow. But they were a little bit late on the next big trend.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of META either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Google: I Never Thought That Alphabet’s Moat Could Be In Danger appeared first on Up2info.com.

• Google’s stock has experienced a significant correction due to poor revenue growth in its cloud business.
• However, the company has seen improved operating income within its cloud division, which will help improve overall margins.
• Google’s steady buyback pace and strong cash flow position make it a good option for long-term investors.

Google (NASDAQ:GOOG) stock has suffered one of the biggest corrections since the pandemic in March 2020. Most of the blame goes to poor revenue growth performance in cloud business. However, the positive trend in the recent quarterly earnings was the operating profit reported within the cloud business. In the year-ago quarter, Google Cloud reported negative $440 million in operating income compared to positive $266 million in the recent quarter. This improved operating income by over $700 million for the recent quarter or close to $3 billion annually. Overall, there was $4 billion improvement in operating income as headcount reduction improved efficiency. This trend will help the company in reporting better margins in the near term. As mentioned in a previous article, YouTube is also showing improvement in advertising and subscriptions which will improve the overall growth trajectory for the company.

Google is investing this massive cash flow in buybacks. In the recent quarter, the company spent another $15.8 billion on buybacks. The steady buyback pace is a more sustainable strategy as the company can forecast where resources need to be diverted in the future. At the current stock price, this pace of buybacks will boost EPS by 4% annually.

Google does not have massive investment needs unlike Amazon (AMZN) in logistics or Apple (AAPL) in streaming business. Google Cloud has turned profitable, reducing the need for higher cash flows. The company also has over $100 billion in net cash position with a quarterly free cash flow of over $20 billion. Hence, the company could easily sustain the current buyback pace for the next few years. Steady growth in Google Cloud and Google Other segment should help in improving overall revenue growth. Even with modest high-single digit revenue growth and good buybacks, the stock could deliver over 15% EPS growth making it a good bet for buy and hold option for long-term investors.

Steady and strong buyback pace

Google has bought back stocks at a steady pace over the last few years despite big swings in the stock price. This shows that the management is not trying to support the stock price or buying stocks at advantageous positions. It is instead trying to invest a stable share of the free cash flow in reducing the share count. In the recent quarter, Google’s FCF was over $20 billion and it could easily cover the stock buybacks.

Figure: Google’s stable FCF and buyback compared to swings in other big tech peers. Source: YCharts

Google has a lot more stable FCF and buybacks compared to other big tech companies like Apple, Microsoft, and Meta. This should allow Google to maintain a healthy buyback pace in the next few years. At the current stock price and buyback pace, the company is able to show 4% annual EPS growth through buybacks alone.

Figure: Improvement in operating income within Google Cloud. Source: Company Filings

There has been a big focus on the drop in revenue growth within Google Cloud. This seems shortsighted because the long-term trend is still quite positive. Google has improved the operating income within the cloud division by $700 million compared to the year-ago period, which is equal to almost $3 billion on an annualized basis.

Good revenue growth potential

There have been many stocks with healthy buybacks that have given poor returns to investors over the long term. Hence, it is important to gauge the revenue growth potential of the company as well.

Figure: Google has several high-growth businesses beyond the core search business. Source: Company Filings

In the recent quarter, the company reported double-digit growth in revenue in constant currency. Google Other segment is also performing quite well. The Google Other segment consists of hardware, YouTube subscription, Google Play, and other services. The revenue share of these high-growth segments will increase over the decade making them more important for the overall revenue growth.

The revenue share of Google Cloud and Google Other has increased to 21%. Both these segments have very high growth potential and we could see their revenue share increase to over 40% in the next few years. Despite slower growth in the ad business, Google has other high-growth segments which can boost the overall revenue growth for the company.

A trillion-dollar question

Apple has spent over $500 billion on buybacks in the last decade. It has also spent a big chunk on dividends which Google does not pay. It is likely that Google could spend close to a trillion dollars on buybacks in this decade as its revenue and net income continue to grow. This could add a significant tailwind to the stock price. In the recent quarter, Google reported 11% YoY revenue growth in constant currency. This is despite the fact that the company is facing macroeconomic headwinds.

Taking a very cautious estimate, Google should be able to deliver 8-10% annual revenue growth till 2030 with stable margins. Adding 4-5% tailwind from buyback should help the company deliver more than 15% annual EPS growth over the long term. This makes it a good bet for investors looking for a growth stock with good moat.

Apple’s revenue growth has been a modest 125% over the last ten years which is equal to a mere 8.4% compound annual growth rate. The net income has also grown at close to a similar level, which shows that there has not been a big margin expansion. However, Apple stock has delivered total returns a lot higher than S&P 500. A major reason has been the massive buybacks. This has allowed the EPS to grow at CAGR of 15.5% over the last ten years.

Google is a more mature company compared to ten years ago. However, it is still very likely that it will outperform S&P 500 over the next few years due to good revenue growth potential and with a tailwind of strong buybacks.

Impact on Google stock

Google stock is trading at a forward PE of 21 compared to 30 for Microsoft and Apple. The historical average PE of Google stock for the last ten years has been over 30. This shows that Google stock is quite reasonably priced. On the other hand, Google’s YoY revenue growth has been a lot better than Apple and has been close to Microsoft for the last few quarters. The forward revenue growth estimate for Google looks better than many other tech peers.

Figure: Comparison of key metrics for Google, Microsoft, and Apple. Source: YCharts

We can see from the above image that Google stock is trading at a discount compared to Microsoft and Apple in terms of forward PE ratio. Google Cloud and Google Other segments could improve the revenue growth trajectory and also improve margins for the company. Google still enjoys an overwhelming market share in search business and has a strong moat. The tailwind of buybacks will further help the stock deliver better returns over the long term.

Investor Takeaway

Google is spending close to $60 billion annually on buybacks. These buybacks are easily covered by the FCF and the company has another $100 billion in net cash. Google Cloud has started showing positive margins which can help in improving the overall profitability of the company. We could see further increase in buybacks over the next few years. It is likely that Google will spend close to a trillion on buybacks in this decade which should help improve the EPS growth trajectory.

Even with modest revenue growth, the stock could deliver over 15% CAGR returns in the next few years making it a good buy-and-hold option.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Google: Silver Linings Despite Correction appeared first on Up2info.com.

• Alphabet beats revenue and earnings estimates, but cloud revenue disappoints.
• Alphabet has a significant advantage in AI and has the financial resources to invest in AI at a rapid pace.
• The company is infusing AI into all its products, including Search, Workspace, Maps, YouTube, and Google Cloud Platform.
• The stock dropped post-earnings, allowing savvy investors to buy on the dip.

Alphabet (NASDAQ:GOOG) (GOOGL) reported its third quarter 2023 earnings on October 24, 2023, soundly beating analysts’ consensus revenue and earnings estimates, driven by strong advertising and YouTube results. However, investors were disappointed in the company’s cloud business results. Investors reacted by dropping the stock price by almost 10% the next day to close at $126.67.

Any pullback in stock price gives investors the perfect opportunity to invest in a company ideally positioned to become one of the top Artificial Intelligence (“AI”) leaders. Alphabet has a significant first-mover advantage in AI and the financial resources to maintain its position as one of the leading innovators in the space. AI research and development are costly, requiring massive investments. As of the end of September, it has $120 billion in cash and short-term investment against $13.781 billion in long-term debt. It produced almost $78 billion in trailing 12-month free cash flow, primarily from its lucrative Search business model. Only a few companies globally have the financial resources to invest in AI at the pace of Alphabet.

Although Microsoft (MSFT) and OpenAI grabbed many headlines concerning generative AI and Large Language Models (LLMs), Alphabet has arguably been the most aggressive investor in AI and autonomous technologies over the last decade. Alphabet’s Google started working on self-driving cars in 2009. The company bought eight robotics companies within six months in 2013 and bought DeepMind in 2014. It was among the first large tech companies to shift from a mobile-first company to an AI-first company, making that announcement in 2016. It invented Transformer, the precursor technology to ChatGPT, in 2017. So, the narrative that Microsoft is far ahead of Alphabet in AI may be overblown.

If you are a growth investor looking for one of the best ways to invest in AI over the next decade, now is the time to start giving Alphabet a serious look.

The company is infusing AI into all its products

Since Microsoft and OpenAI awakened this sleeping AI giant by introducing ChatGPT in November of 2022, Alphabet has sprinted to add generative AI products to its consumer and enterprise businesses. One of the first places that Alphabet incorporated this new technology was Search. When OpenAI introduced ChatGPT, an ex-Google employee, Paul Buchheit, the creator of Gmail and Google AdSense, promoted the idea that OpenAI’s new AI technology would quickly destroy Google Search.

Alphabet quickly countered the theory that Microsoft adding ChatGPT to Bing could rapidly annihilate Google Search by introducing Bard’s Generative AI capabilities into Search to create Search Generative Experience (“SGE”). This new product improves Google Search and is competitive with the Bing-ChatGPT combination. So far, there is little evidence that Microsoft is gaining much ground in Search. Chief Executive Officer (“CEO”) Sundar Pichai said on Alphabet’s Third Quarter Earnings call:

With Generative AI applied to Search, we can serve a wider range of information needs and answer new types of questions, including those that benefit from multiple perspectives. We are surfacing more links with SGE and linking to a wider range of sources on the results page, creating new opportunities for content to be discovered.

Source: Alphabet Third Quarter 2023 transcript

The company is also adding Bard to more areas than Search. Bard integrates with Workspace, Maps, YouTube, and Google Flights and Hotels. Alphabet has also added Bard to Google Assistant, thereby introducing generative AI into Android — an advantage over Microsoft, which lacks a viable mobile platform.

Last but not least, it has positioned itself to become a premier AI infrastructure company through its cloud assets. Through the Google Cloud Platform (GCP), companies, developers, data scientists, and engineers can create, train, trial, track, fine-tune, and deploy Machine Learning and AI models. GCP is attractive to early-stage AI companies and large enterprises alike. CEO Pichai said the following during the earnings call:

Today, more than 60% of the world’s 1,000 largest companies are Google Cloud customers… [And] more than half of all funded Generative AI startups are Google Cloud customers. This includes AI21 Labs, Contextual, Elemental Cognition, Rytr, and more.

Source: Alphabet third quarter 2023 earnings call transcript

Alphabet has made a big bet on generative AI helping Google Cloud gain ground on Amazon’s (AMZN) AWS and Microsoft Azure.

However, the cloud business lays an egg in the third quarter

So far, Alphabet’s big bet on AI has failed to pay off in the cloud. Investors expected a lot out of the cloud business in the latest quarter, especially after it only recently attained operating profitability earlier this year, a feat some thought was impossible. However, the cloud produced less growth than investors sought in the third quarter. Google Cloud revenue grew 22% to $8.41 billion, missing Wall Street estimates of $8.64 billion. Adding insult to injury, Microsoft also reported earnings the same day, with its Intelligent Cloud segment and Azure public cloud exceeding consensus analyst estimates. Investor Business Daily reported that KeyBanc Capital Markets analyst Justin Patterson stated in a report, “Google Cloud appears to have ceded market share to Microsoft Azure.”

Alphabet has invested a lot in building AI capabilities because it believes the technology can help it differentiate its cloud platform from the competition and appeal to new customers. So, Google Cloud’s lack of progress in gaining share from Microsoft’s Intelligent Cloud stings. Chief Financial Officer (“CFO”) Ruth Porat said on the company’s third-quarter earnings call, “The Q3 year-on-year growth rate reflects the impact of customer optimization efforts.” During 2022, “customer optimization efforts” often meant that companies were looking to find ways to cut their cloud costs — a poor scenario for increasing Google Cloud sales.

Some additional risks

The most significant risk investors need to watch is that Alphabet faces two antitrust lawsuits by the U.S. Department of Justice (“DOJ”), which filed its first lawsuit in 2020; the DOJ later combined its litigation with a lawsuit by 35 states, the territories of Puerto Rico and Guam, and Washington, D.C. This 2020 lawsuit alleged Google monopolized search and search advertising. The case went before a judge in early September 2023 and should last approximately three months.

The DOJ filed its second antitrust lawsuit seeking to break up Google’s ad business in January 2023. The DOJ announced on April 17, 2023, that 17 states had joined it in the second lawsuit. An adverse ruling in either case could crimp Alphabet’s most lucrative business, Search advertising. Even if it receives a favorable ruling, the litigation could set the company’s business back comparable to the ills Microsoft faced during its long, arduous antitrust trial in 2001. It faces litigation in other areas of the world, too. The European Commission also wants to break up Google’s ad business. And recently, Japan’s Fair Trade Commission has started investigating Google’s Android practices with smartphone makers.

Some of Alphabet’s competitors are licking their chops as they realize that anything damaging Google’s ad business will help them. These companies include Microsoft, The Trade Desk (TTD), TikTok, Meta Platforms (META), Roku (ROKU), Magnite (MGNI), Snap (SNAP), PubMatic (PUBM), BigCommerce (BIGC), and any other company with a stake in the digital ad market. With government regulators taking a stand against Google, it should be easier for companies to break through Google’s Search monopoly.

Last but not least, although it may be difficult for any one company to break through Google’s moat without the aid of the government, the era of generative AI makes it possible for all companies to create AI chatbots. Companies like Meta Platforms have already developed 28 different chatbots, each specializing in various topics and having different personalities. The sheer weight of all the chatbots coming onto the market from multiple companies could also break Google’s monopoly on Search as people may prefer other companies’ chatbots for answers to different questions.

The good news

All the critical metrics outside of Google Cloud were favorable. Alphabet’s largest source of revenue, the advertising business, continues to recover after a terrible 2022. Google’s total ad revenue grew 9% to $59.65 billion, beating analysts’ estimates of $59.12 billion. YouTube ad revenue grew 12% to nearly $8 billion, beating analysts’ YouTube ad revenue estimates of $7.82 billion.

Even better, Alphabet is no longer the freewheeling company that spent money like a drunken sailor like it was before interest rates rose. During the third quarter earnings call, CFO Porat said that Alphabet is “looking to grow revenues at a faster rate than expenses as we’re focused on delivering sustainable financial value.” This focus on controlling costs is helping to reaccelerate earnings growth in 2023, partly behind the stock’s rise this year.

Lastly, while the Cloud unit’s underperformance is a concern, investors should also factor in that Alphabet has only recently rolled out many of its AI cloud products that it announced at the Google Cloud Next 2023 developer conference held between August 29–31. For instance, the company only released Duet AI for Google Workspace, a competitor to Microsoft Copilot, on August 29, two-thirds of the way into the third quarter. So, it may be too early to determine whether Alphabet’s cloud AI products will help it gain on Azure and AWS.

Suppose Google Cloud’s AI products appeal to customers after they get a chance to try them, and an improving economy makes customers less inclined to achieve cloud cost savings; sales growth for its cloud business could be satisfactory over the next three to five years. The market may have overreacted to Google Cloud’s revenue shortfall and will quickly forget this revenue miss if the company’s AI efforts pay off in the long term.

The market undervalues the stock

The chart below shows Alphabet’s consensus analyst earnings-per-share (“EPS”) estimates between 2023 and 2028. The company has a five-year EPS compound annual growth rate of 17.36%.

The company trades at a forward price-to-earnings (P/E) ratio of 21.22 and a one-year forward P/E ratio of 18.37, far too low for a company of this quality. Suppose you consider the company’s solid business model, strong track record of execution, leadership in the rapidly expanding field of AI, and high double-digit EPS estimates over the next five years; Alphabet deserves a higher premium for its EPS growth. The following chart shows the company’s forward P/E ratios.

The following chart compares Microsoft and Alphabet’s EPS growth rates and forward P/E ratios. This comparison shows that although Alphabet displayed a much higher EPS growth rate in the third quarter, Microsoft showed a much higher forward P/E ratio. While Microsoft deserves the higher valuation because of its more solid cloud numbers, Alphabet should trade at least a forward P/E of around 25. This valuation calls for a stock price of $143.59, 17.5% above Alphabet’s October 27 closing price of $122.17.

Last, Alphabet’s GF Value of $144.74 was 18% above its closing stock price on October 27, 2023, signaling the market could be modestly undervaluing the stock. The GF Value is a proprietary calculation designed to measure the Fair Value of a stock.

Should you buy the stock?

Only two weeks ago, Alphabet’s stock price was at its 52-week high of $142.38, up 60% for the year, and some investors wondered whether it was too late to invest. If you were one of those investors, the market has now given you another opportunity to add this AI leader to your portfolio. I recommend aggressive growth investors buy the stock at these levels.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of GOOGL, AMZN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Google: Buy This AI-Driven Company On The Post-Earnings Dip appeared first on Up2info.com.

• Alphabet reported better-than-expected earnings, driven by rebounding digital advertising spending on Google and YouTube platforms.
• Google’s free cash flow grew almost four times faster than its revenues, highlighting the strength of its advertising platforms.
• The earnings report caused shares to drop 6%, and I believe the market overreacted here. I will explain why Q3’23 earnings were a huge win for the technology company.
• With a 5% free cash flow yield and potential for organic growth in advertising and Cloud businesses, investors can benefit from Google’s current valuation.

Alphabet (NASDAQ:GOOG) reported much better than expected earnings for the firm’s third quarter, driven by a rebound in digital advertising spending on both the Google and YouTube ad platforms, resulting in a return to double-digit top line growth. The rebound in the advertising business is good news because slowing ad spending has weighed on Google’s financial results in the last year. What was an important takeaway from the earnings release was, in my opinion, that Google’s free cash flow, on a Y/Y basis, grew 3.7X faster than its revenues… which underlines the strength of its advertising platforms.

Shares dropped 6% after earnings, on slowing Cloud growth, which reflects a misreading of Google’s earnings report, in my opinion. At the current valuation, investors can get a 5% free cash flow yield and participate in the upside provided by the organic growth of the advertising and Cloud businesses!

Previous rating

My last available rating on Google was strong buy: Google: This FAANG Laggard Has Q2 Surprise Potential. The reasons for my previous rating were favorable trends in the digital advertising market (which continued to play out), improving EPS estimates, and continual potential for an ad market recovery. In addition, I would now name as strong buy reasons: (1) Accelerating revenue to free cash flow translation and (2) FCF margin expansion.

Google delivers top and bottom line beat

Google’s third-quarter earnings report beat estimates on both the top and the bottom line: the technology firm achieved revenues of $76.7B which was $908M better than the consensus estimate while adjusted earnings of $1.55 per share beat the average prediction by $0.10 per share.

Double-digit top line growth is back, Google’s main accomplishments in Q3’23

Google benefited profoundly from a rebound in advertising spending in the third quarter which was reflected in 11% top line growth. Google Search saw 11% revenue growth while YouTube ads delivered 12% growth compared to the year-earlier period. Google generated a total of $76.7B in revenues in the third quarter. Google Cloud revenues were $8.4B and increased 22% year over year. In the previous quarter, Google Cloud delivered 28% year-over-year growth so this segment has seen a bit of a slowdown here. The slowdown was likely also the reason behind Google’s shares dropping 6% after the earnings report.

While Google Cloud is important as a growth driver, it still accounts for only about 11% of revenues. Google Search & YouTube, on the other hand, account for 68% of total revenues… in other words, the improvement in the ad part of Google’s business should have outweighed the slowing growth in Cloud by a significant margin. Overall, the earnings report was exceptionally strong, in my opinion, especially with the digital advertising business rebounding strongly.

Click to enlarge

(Source: Author)

Free cash flow grew 4x faster than revenues (Y/Y)

The biggest takeaway from Google’s third-quarter earnings release was not that the technology company is benefiting from a rebound in ad spending on its two major platforms (although this is also true), but that free cash flow is growing at a much faster rate than revenues.

Google generated $22.6B in free cash flow on revenues of $76.7B which calculates to a free cash flow margin of 30%. showing an FCF margin improvement of 6.2 PP. Free cash flow, year over year, grew a massive 41%, almost four times faster than revenues. The rebound in free cash flow is in large part due to the revenue rebound on its scalable digital advertising platforms.

Click to enlarge

(Source: Author)

Google’s valuation

Google’s rebound in the digital advertising market, benefiting both Search and YouTube, has resulted in a massive free cash rebound year over year. With $22.6B in quarterly free cash flow, Google could be set to achieve just around $90B in free cash flow in the next twelve months. This translates to a 20X FCF multiplier factor or a decent 5% free cash flow yield, plus shares have upside as Google’s earnings and free cash flow continue to grow organically in the ad and Cloud businesses.

Based off of earnings, Google is valued at 21X forward earnings. The revaluation that has already taken place this year has caused the share price to trade above its 1-year average P/E ratio. However, there is no reason, in my mind, why Google can’t trade at the P/E ratio of Microsoft (MSFT) or Apple (AAPL). At a ~25X P/E ratio, Google would have a fair value around $168, implying about 27% revaluation potential.

Risks with Google

The recent USD strength is a potential problem and earnings headwind for Google. The tech firm achieved only about 47% of its revenues in the third quarter in the U.S., with the rest of its top line coming from other geographies, especially Europe and Asia. A strong USD is a headwind because it makes profits stored abroad less valuable for U.S. companies. Another risk that I see relates to Google’s Cloud business. Investors are especially sensitive to Cloud performance, even if total company performance is improving. A continual slowdown in Cloud may therefore affect the valuation factor despite overall top line and free cash flow growth.

Final thoughts

One takeaway from Google’s Q3’23 earnings release was that the company is enjoying double-digit top line growth again. The ad market slowdown therefore seems to be a thing of the past. A much stronger takeaway was that returning advertising strength in both Search and YouTube has resulted in about four times stronger free cash flow growth relative to top line growth. Google generated a massive $22.6B in free cash flow in Q3’23 and the company’s FCF margins are still expanding. Although Cloud growth slowed Y/Y, I believe the market is too singularly focused on this specific segment. Google’s Q3’23 earnings were a solid win for the company overall and I believe shares remain an exceptionally attractive long-term investment!

Analyst’s Disclosure: I/we have a beneficial long position in the shares of GOOG, MSFT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Why Google Is A Bargain After Q3 appeared first on Up2info.com.

• Despite posting a double beat in Q3, Alphabet stock is tanking by ~6% in the after-hours session.
• Robust performances in the Search and YouTube businesses are likely being overshadowed by a sharp deceleration in Google Cloud and management’s guidance for capex spending.
• However, in light of the post-Q3 sell-off, GOOGL stock now looks fairly valued. I continue to rate Alphabet a modest “Buy” at ~$130 per share.

Brief Review Of Alphabet’s Q3 2023 Report

Heading into its Q3 2023 report, Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) was projected to deliver revenues and normalized EPS of $75.8B and $1.45, respectively.

While Alphabet beat estimates on both top and bottom lines [revenue: $76.9B (up 11% y/y), normalized EPS: $1.55 (up 46% y/y)], the stock is down nearly -6% to $130 per share at the of writing. Given the stock was running ahead of our fair value estimates going into earnings, I’m not entirely surprised by Mr. Market’s negative reaction to this report, but I do see a couple of negatives in the report that might be driving the sell-off. Let’s jump straight into the Q3 2023 numbers.

Despite facing challenging macroeconomic conditions and increased competition, Alphabet’s Search business remained incredibly resilient in Q3, with search business growth re-accelerating to +11% year-over-year. Clearly, Microsoft’s new AI-powered Bing is not making any inroads into Search advertising, a market where Google has monopolistic dominance.

In Q3, YouTube revenues rose 12.45% y/y, marking further (somewhat expected) re-acceleration at a time when the writer and actor strikes in Hollywood are pushing consumers toward other entertainment platforms.

As I see it, Alphabet’s Ads businesses are firing on all cylinders as the digital advertising market rebounds from the abyss of the last several quarters. However, I’m also seeing a real weak spot in Alphabet’s report, with the Google Cloud business decelerating to +22% y/y growth (down from +28% y/y in Q2 2023). This deceleration is particularly alarming due to strong results at Microsoft Azure, and in my view, Alphabet’s Cloud performance is the major factor behind Mr. Market taking a glass-half-empty view of these otherwise solid set of financial numbers.

Overall, Alphabet’s revenue grew by +11% y/y in Q3 2023, with strength in Search and YouTube driving extending the ongoing re-acceleration. And as we have discussed in the past, AI opportunities can unlock the next leg of growth at Alphabet.

Let us now look into Alphabet’s profitability.

Growing hopes of a soft landing have been driving a recovery in ad spending. And this positive inflection in the business environment coupled with management’s cost-cutting measures drove Alphabet’s Q3 2023 operating income up to $21.34B (up +24.57% y/y vs. +12.3% y/y in Q2 2023) and operating margin up to 28% (vs. 25% in Q3 2022).

Despite experiencing a sharp revenue growth deceleration in Q3, Google Cloud managed to record another quarter with positive operating income, which is a big positive, in my view. As we know, Alphabet’s leadership team is still re-engineering the cost base, and given high Search margins there’s clearly more upside room on the operating margin (profitability) front.

However, management warned about increased capex spend (elevated level of investment in technical infrastructure) in Q4 2023 and 2024 during the Q3 earnings call, and so, I think the margin trends could worsen here for a while (before improving again in 2025 or 2026).

That said, in my past reports on Alphabet, I have labeled the digital advertising giant as a free cash flow machine and an infinite buyback pump due to its robust cash generation and humongous capital. And I see no reason to change my opinion here. During Q3, Alphabet generated $22.6B in free cash flow and returned $15.8B to shareholders via stock buybacks.

As of the end of Q3, Alphabet’s net cash balance stood at nearly $106B giving the company a fortress-like balance sheet, which in my opinion, is the strongest among all big tech companies due to very little long-term debt.

Considering Alphabet’s monopolistic dominance in the digital advertising market, promising growth opportunities in AI, robust free cash flow, and strong balance sheet, I believe that Alphabet’s management has all the tools to drive solid shareholder returns over the next five years by employing financial engineering techniques such as stock buybacks.

To illustrate this, we can use our Valuation Model.

Alphabet’s Fair Value And Expected Return

In the past, I have highlighted Alphabet’s lopsided exposure to a cyclical advertising market as a good reason for its stock to trade at a discount to some of its big tech peers. However, Alphabet’s financial performance is at par with rivals such as Apple (AAPL) and Microsoft (MSFT), and so, GOOGL stock shouldn’t really be trading at a ~20-25% discount to its peers on a relative basis.

With a rally in Alphabet and a sell-off in Apple, the valuation gap between those two tech giants has narrowed significantly in recent weeks. However, Microsoft continues to trade at an astronomical valuation. Given the spectacular run-up in long-duration Treasury yields to ~5%, I think a de-rating to ~20x P/FCF for the big tech giants is a real near-term possibility.

From a relative valuation standpoint, I no longer see a valuation upside in Alphabet stock. However, let’s deduce the absolute fair value for Alphabet using TQI’s Valuation model before reaching any conclusions.

In my previous note, I wrote –

With Alphabet currently growing at low to mid-single-digit rates, a re-acceleration to double-digit growth looks implausible right now; however, I believe that AI could unlock massive new revenue opportunities for Alphabet. For my model, I have assumed a 10% CAGR revenue growth rate for the next five years. Furthermore, I have assumed an optimized FCF margin of 25%. Generally, I utilize a 15% discount rate in my DCF models; however, I think Alphabet’s business resilience and robust cash flow generation warrant a lower discount rate. For this exercise, I assumed a required IRR (discount rate) of 10%, which is what I have used only for Microsoft and Apple in the past.

Source: Google: Q2 2023 Earnings, Valuation, Technicals, And More

Given Alphabet’s business has re-accelerated back to +11% y/y in Q3 2023, I’m feeling more comfortable with my five-year growth projection. Despite solid margin improvement, I’m sticking with my conservative optimized FCF margin assumption of 25% to implement a margin of safety in our model.

Here’s my latest valuation model for Alphabet (including estimate Q4’23):

As you can see above, Alphabet’s fair value is ~$120.40 per share (or $1.53T market cap). With the stock currently trading around $130 per share, Alphabet stock is still overvalued by ~7%. That said, Alphabet has a positive net cash balance of ~$106B (or roughly ~$8 per share). If we were to add this net cash back to its fair value (derived by DCF), Alphabet would be more or less fairly valued right here.

Assuming a base case P/FCF (exit) multiple of ~20x for 2027-28, Alphabet’s stock could rise from $130 to $252.6 per share at a CAGR rate of 14.21% over the next five years.

Since Alphabet’s expected CAGR return is still slightly lower than my investment hurdle rate of 15%, I’m not an eager buyer of Alphabet at current levels. That said, Alphabet is a decent buy for investors willing to accept somewhat lower returns (~14% per annum) in exchange for lower volatility.

Concluding Thoughts: Is Google A Buy, Sell, Or Hold After Q3 2023 Earnings?

Last October, I rated Alphabet stock a “Strong Buy” in the $90s in Google: My Favorite Contrarian Bet In This Uncertain Market, and since then, I have published numerous bullish recommendations on GOOGL stock:

And, in my previous note, I expressed the following thoughts on GOOG stock:

Having consolidated at the $120-$125 range before breaking out to the upside (after the announcement of Q2 earnings), Alphabet looks poised to take a run at its all-time highs of ~$150 in the coming weeks and months.

Conversely, a breakdown below $120 could lead Alphabet to pull back down into the $90s. Technically, the risk/reward in Alphabet is quite balanced; however, momentum supports a bullish position.

Source: Google: Q2 2023 Earnings, Valuation, Technicals, And More

With today’s after-hours sell-off, Alphabet stock has dropped slightly below the $130 level, and technically, a re-test of the $120-125 zone is very likely now given the magnitude of the post-earnings move and the gap at $123-126.

Heading into a potential recession, my overall outlook for “Magnificent 7” big tech stocks is bearish. However, Alphabet looks fairly valued in light of its post-Q3 sell-off. In the event of a hard landing, I would expect to get a sizable discount on GOOGL stock, but as a long-term investor, I continue to like the business and intend to hold my long position in Alphabet stock for years to come. While I won’t be buying here due to my current allocation being at target weight, I will probably start accumulating shares around the 200-DMA level at ~$115-120 if GOOGL stock were to get there.

The long-term risk/reward for Alphabet remains attractive with a five-year expected CAGR of 14%. In light of its Q3 report, I continue to see Alphabet as a reasonable “safe haven” to hide out in this uncertain macroeconomic environment, with the added bonus of participation in the secular growth mega-trend of artificial intelligence.

Key Takeaway: I continue to rate Alphabet a modest “Buy” at $130, with a strong preference for slow, staggered accumulation.

If you are pondering between Alphabet’s tickers, here’s the better buy:

• GOOG Vs. GOOGL Stock: 2 Ways To Buy Alphabet, One Of Them Is Always Better

Thanks for reading, and happy investing. Please share your thoughts, concerns, and/or questions in the comments section below.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of GOOGL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

How To Invest In This Environment?

In order to navigate this tricky economic period, we are pursuing “Bold, Active Investing with Proactive Risk Management” at our investing group – “The Quantamental Investor“. 

Join our community today and take control of your financial future.

LEARN ABOUT THE QUANTAMENTAL INVESTOR

The post Google Q3: Double Beat Foiled By Cloud Deceleration And Capex Spend Guidance appeared first on Up2info.com.

• Alphabet Inc. is set to report Q3 results with analysts expecting an EPS growth of 36% and revenue growth of 10% on a YoY basis.
• Google Cloud Platform has been flying under the radar with all the focus on advertising and AI.
• GOOG stock is the best YTD performer among mega-cap tech stocks and heads into Q3 with stronger expectations than Q2.
• Judge this company and its stock over the long term as its ecosystem is built to survive and thrive.

Alphabet Inc. (NASDAQ:GOOG) (GOOGL) is expected to report results for its Q3 that ended September 30th, 2023, post-market on Tuesday, October 24th. Analysts expect Alphabet to report an EPS of $1.45 on revenue of $75.70 billion. Should Alphabet meet these numbers, that would represent an EPS growth of 36% and revenue growth of nearly 10% on a YoY basis. That sounds impressive for a trillion-dollar company, despite the fact that Q3 2022 was one of the largest profit drops reported by Alphabet in its history.

My last coverage on Alphabet was ahead of its Q2 earnings. I had rated the stock a “Buy” at that time, citing undervaluation heading into the Q2 report. Since then, the stock has gone up nearly 13%, handily outperforming the S&P 500’s -4.73% in the same time period. With that background out of the way, let’s preview Alphabet’s Q3 without any further ado.

Uptick In Expectations

One of the biggest things Alphabet had in its favor heading into Q2 was the stock’s under-valuation and relatively lower expectations. This time around, Alphabet’s stock is heading into Q3 earnings in an upbeat mood. Backed by the strong Q2 report and Q3 guidance, EPS expectations have gone up from $1.29 at the beginning of the year to $1.44 now. More to the point, it was at $1.33 at the time of its Q2 report and has since jumped 8% to reach $1.44.

25 out of 26 EPS revisions have been to the upside and 25 out of 27 revenue revisions have been to the upside as well. Once again, this is in contrast to Q2 where only 19 out of the 27 revenue revisions were to the upside.

Overall, the set-up for Q3 is beginning to look vastly different from that of Q2 as analysts seem to be expecting more heading into Q3. Perhaps the stock may be a little ahead of itself? Let’s wait and see.

Beat or Miss? Early Signs of Trend Reversal

In the last 12 quarters, Alphabet has beaten EPS estimates 8 times and revenue estimates 9 times. Those numbers were the same during the Q2 preview. But more importantly, Alphabet has now reported two consecutive EPS beats after missing estimates 4 consecutive quarters in 2022.

In the Q2 preview, I had predicted that the company would beat slightly on revenue and that the EPS beat/miss would come down to the company’s operating discipline (AKA expenses). That turned out to be true as revenue beat by a small margin (2.54%) but EPS beat by a slightly bigger number (7%) due to overall operating margin going up YoY from 28% to 29%. I predict a slight beat on both revenue and EPS once again, but unlike last time, I believe the stock’s pre-earnings run-up may require more than a small beat to justify any further run-up in stock price.

Advertising and AI – Still The Two Main Stories But Something Is Peeking Through The Cloud

In my Q2 preview, I had written that Advertising and AI were likely to be the top two stories in that quarter. Advertising revenue came in at $58.1 billion, up 3.30% from 2022’s Q2. In addition, the company also reported that AI focus was going on at full speed with teams being refocused on the efforts.

• For Q3, advertising will still be the core moneymaker obviously, and I conservatively predict a similar 3% to 4% growth YoY, bringing Q3 2023’s advertising revenue between $56.1 billion and $56.7 billion. That’s still more than 75% of the total revenue expected at $75 billion and likely why the company finally moved aggressively on its AI efforts.
• In the Q2 report, CEO Sundar Pichai focused on the company’s headcount and reprioritization:

“To take advantage of AI, Alphabet has been “sharpening our focus as a company, investing responsibly with great discipline and finding areas where we can operate more cost-effectively,” Pichai said. That includes headcount reductions and relocating teams, including aligning Waze ad sales with the existing business, and combining engineering efforts across core infrastructure and cloud: “Overall, we are actively moving people to higher-priority activities within the company.“

But, if you are looking for a reduction in total expenses in Q3, I think you’d be disappointed. Despite the constant chatter about reducing headcount and refocusing on critical items, Alphabet reported a 4.50% YoY jump in total employees in Q2 2023 and a 5% jump in total expenses YoY. I am a believer in “watch what they do and not what they say” and will be closely monitoring the costs and expenses section when the Q3 report comes out.

• Ironically, Google’s cloud has stayed above the clouds for a while now but has chalked up an impressive streak of quarterly revenue growth dating back to at least Q1 2020. Now, peeking through the cloud, Google Cloud Platform [GCP] reported its 2nd consecutive profitable quarter on the back of a record $8.03 billion revenue in Q2 2023. I expect both the revenue and profit streaks to continue for GCP in Q3 given the company’s expanding infrastructure around the world with 39 Google Cloud regions.

Valuation – Best Among The Big Boys

Heading into Q2 earnings, Alphabet’s stock was:

• the cheapest among mega-cap tech stocks.
• cheap on its own relative to its growth prospects and,
• weakest performer among the mega-cap tech stocks YTD (then).

Things are a little different heading into Q3.

• Alphabet is still the cheapest with a forward multiple of 24.50 compared to Apple Inc. (AAPL) at 29.4, Microsoft Corporation (MSFT) at 29.7, and Amazon.com, Inc. (AMZN) at 60. However, Alphabet’s case for undervaluation shrunk as the difference (in forward multiple) between Alphabet and the 2nd cheapest in the group (Apple) was 10 back then and is just 5 now.
• Alphabet’s valuation on a stand-alone basis has become attractive as the expected earnings growth rate has gone up from 16% to 18.40%. That gives the stock a Price-Earnings/Growth [PEG] of 1.33 heading into Q3 report as opposed to 1.4 heading into Q2 report.
• Alphabet stock is no longer the weakest performer YTD among the mega-cap stocks. In fact, the stock is now the best performer in this group as it is up nearly 55% YTD compared to Microsoft at 37%, Apple at 43%, and Amazon at 51%.

It is now safe to say the relative under-valuation story heading into Q2 has turned into a fairly to perhaps a smidgen over-valued story.

Technical Strength – Sitting On A Solid Base

GOOG stock has gotten pretty strong technically since the Q2 preview as we head into the Q3 report. For example, the 200-Day moving average has moved up from $104 to $115. That the stock is trading well above the 100-Day and 200-Day moving averages is generally good news. But please be aware that in case the Q3 report (or Q4 guidance) turns out bad and the market continues its recent wobble, the stock has a way to fall before finding support.

The stock’s Relative Strength Index (“RSI”) has gone up from 49 during my last article to 68 now. But this is good for the stock from a technical perspective as it shows strength and accumulation with enough room left before getting overbought.

Conclusion

I expect Alphabet to report a strong Q3 with a beat on both EPS and revenue but unlike with Q2 report, I don’t believe the stock will move much higher after the Q3 report as it is arguably fairly valued heading into the report with higher expectations.

However, a curveball to finish the article. Despite my cautious tone throughout the article, I am sticking with my “Buy” rating as I’d like Alphabet (and myself) to be judged on long-term performance and not quarterly. With an ecosystem that is, in my opinion, behind only the likes of Apple, Microsoft, and Amazon, Alphabet has a lot in its favor as it can cross-sell and cross-offer its platforms like few others can do. For example, in the Q2 report, CEO Pichai talked about how its AI approach makes innovation easier for its users by offering GCP infrastructure. Let’s not even get into how Alphabet can (and does) leverage its dominance in search to enhance its fortunes across the board.

So, what’s your take on Alphabet’s upcoming Q3 and its future in general? Please leave your comments below.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of AAPL, AMZN, GOOG, MSFT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Google Q3 Preview: Expect Solid Numbers But Stock May Be Ahead Of Itself appeared first on Up2info.com.

• Today, I will review my Alphabet thesis with you, which consists of four distinct pillars.
• Specifically, within this thesis, I will focus on Alphabet’s cloud business, which I believe to be the “third supermajor.” I will explore precisely what I mean by this with you.
• I will also apply my four foundational investment frameworks to the business, thereby highlighting its attractiveness, and I will perform a valuation exercise using my proprietary valuation model.
• In short, while Alphabet does not offer exactly spectacular returns, I do believe it’s very attractive to the right investor.

My History With Alphabet

In the 2010s, Alphabet (NASDAQ:GOOG) (GOOGL) was one of my largest investments, and, during this period, I was even choosing the username, “Alphabet2030,” because I was so convinced of the thesis and committed to holding until the year 2030.

In the process of building my investing group on Seeking Alpha, and hiring/investing in/training two analysts and an intern, I sold my shares in Alphabet so as to fund these hires, as well as the necessary infrastructure for a small analyst shop.

• (In this vein and as a brief aside, I highly encourage you to read the book entitled, “100 Baggers.” In this book, there’s a short vignette about a lawyer who did approximately the same thing: Sold investments to start a business. At some point into the development of this lawyer’s new venture, the lawyer discovered that, had he simply held onto those investments, he would have been much better off in a variety of respects (namely, his wealth), and, after the last 4 years or so, I can certainly identify with the lawyer!)

Thinking back to the 2010s, when I began my partnership with Alphabet, my core thesis rested on four pillars principally:

1. Alphabet had a series of defensible moats, which it has demonstrated in spades in recent years. These moats have included network effects, brand, economies of scale, and embedding/switching costs.
2. YouTube was an international monopoly, with room to grow via further monetization and international expansion. I personally have used YouTube almost everyday since 2008 or thereabouts. I actually recently remembered, seemingly out of the blue, the day on which YouTube announced it would show ads on its platform. I remembered wondering whether it would meaningfully degrade the user experience. 15 or so years later, my question has been answered (it has not; at least not meaningfully). YouTube is the second most visited website in the world, behind Google; of course, both of which Alphabet owns.
3. Google Search had incremental room to grow internationally as both global population grew and as more humans digitally industrialized. The growing digital industrialization of earth is, in some sense, core to the entire thesis at this point, including the GCP thesis.
4. Alphabet had demonstrated the ability to successfully field new products, and GCP could be a great success, which it has been, as evidenced by its rapid growth and positive operating income today.

Today, each pillar remains intact; arguably more intact than ever. As we will explore today, GCP is firing on all cylinders and could be a truly giant software business in the decades ahead. It could become The Third Supermajor.

In 2020, I added another pillar: the company’s likely share repurchase program.

Today, we will start with an exploration of this facet of the thesis, which I detailed for my readers in 2020; after which, we will explore GCP, how Alphabet fits within our four foundational investment frameworks, and the company’s valuation.

Alphabet’s Cash Hoard Was Destroying Shareholder Value

At the lows in March of 2020, I penned the following note:

• Alphabet’s Cash Hoard Is Destroying Shareholder Value
• In the interest of brevity, I won’t explore the value of share repurchase programs with you today. I encourage you to read one of my recent reviews of Chipotle (CMG) to learn more about why I like companies that repurchase their shares. I like growing companies that repurchase shares in a disciplined fashion so much that I’ve gone so far as to make the value creation mechanism one of my four foundational investment frameworks, which I will share with you in a moment.

In that note, I explored why Alphabet was not being aggressive enough in repurchasing shares and what course of action it should take going forward. As an aside, one of NYU’s business school professors reached out to me and asked me to give a talk to their (neutral pronoun out of respect for privacy) class regarding the ideas I shared therein. I share this to highlight that there’s valuable, textbook information (not just me pontificating as to my views on Alphabet’s stock!).

In my case for a more aggressive share repurchase program, I wrote specifically,

In my proposed ASR, Alphabet would reduce its share count by 8.5% this year alone, which would not only be extremely accretive to shareholder value but also extremely positive for confidence in the market as a whole, as Alphabet makes up a significant portion of the S&P500, relatively speaking.

Interestingly, over the last 3.5 years, since roughly when that note was published, Alphabet has repurchased ~10% of its total shares outstanding, which represents a 10 year shares outstanding reduction rate of approximately 29%.

There’s probably a lesson somewhere in this somewhat coincidental math, e.g., exercise patience in business.

At any rate, I have been content with Alphabet’s concerted effort to return capital to shareholders via more aggressive share repurchases. These more aggressive share repurchases have served to 1) reduce Alphabet’s share count rapidly, and 2) accelerate the rate at which free cash flow per share has grown, and, by extension, the rate at which the company’s share price has appreciated.

We can see these two points in the images/data below:

Alphabet’s Share Repurchase Program Has Accelerated Returns Over The Last 3.5 Years

Alphabet’s Shares Outstanding Have Declined ~10% Over The Last 3.5 Years

Despite a more aggressive share repurchase program in recent years, via which Alphabet’s cash hoard has declined from ~$140B to ~$110B, the company has not taken on more debt, leaving room for the execution of a leveraged recapitalization at some point in the future, which would serve to accelerate the reduction in the company’s shares outstanding even further.

In short, I am quite content with Alphabet’s newfound commitment to returning capital to shareholders over these last few years, and this newfound commitment makes the business even more investable than it was in the 2010s, at least in my eyes.

Let’s now turn to a review of Alphabet’s latest line of business, GCP.

The Third Supermajor

As an owner of Amazon (AMZN) for specifically its AWS asset, I am sympathetic to the concerns some have voiced about the rise of Azure and GCP.

However, in my estimation, history can be a guide in forecasting what the future may look like for the Infrastructure as a Service/Platform as a Service industry, in which AWS, Azure, and GCP have formed an oligopoly, or something very near to it.

Over the last 50-100 years or so, some version of Exxon Mobil (XOM), Chevron (CVX), and Royal Dutch Shell (SHEL), now just Shell, operated in something akin to an oligopoly. These are earth’s three “Supermajors,” vertically integrated oil and gas companies that have dominated, again, in some form, (mergers, acquisitions, antitrust should be noted) over the last 50-10 years.

If data is the new oil, then I believe the new vertically integrated supermajors will be AWS, Azure, and GCP in the 21st century.

With these ideas in mind, Alphabet’s GCP has been performing quite exceptionally as of late.

Alphabet’s Google Cloud Platform [GCP] Growth, Six Months Ended June 30th, 2023

As can be seen above, GCP now operates at about a $30B annualized revenue run rate, with about $1B in operating income currently.

This is fairly incredible, and this performance buttresses the idea that GCP will find itself as the third supermajor data platform in the decades ahead, alongside AWS and Azure.

Infrastructure as a Service Market Share, AWS/GCP/Azure

In the above data, we can see an oligopoly forming, with GCP, Azure, and AWS leaving the other three companies behind. I think it’s notable that Alibaba (BABA) will likely never materially capture market share globally, due to privacy concerns related to the CCP. But I digress.

In short, I think it could be argued that GCP is worth, today, about $200B to $300B in total enterprise value, were the market truly an efficient mechanism pricing in the net present value of all future cash flows for the enterprise. This suggests that GCP has now become a very material contributor to the overall Alphabet thesis, which is incredible insofar as the company has demonstrated the ability to successfully field new products, notwithstanding such immense success from Search and YouTube.

In this vein, let’s now turn to the foundational investment frameworks into which Alphabet fits. After this exercise, we will consider the business’ valuation using the L.A. Stevens Valuation Model.

My Four Foundational Investment Frameworks

I recently shared that I did not feel bad for re-sharing these four frameworks to an excessive extent over the last two months or so. I believe I’ve reached saturation in terms of sharing such that I’d feel bad re-sharing them with you today and having you re-read them yet again.

To this end, if you’ve not already reviewed them, I encourage you to read the following note, in which I shared our four foundational investment frameworks.

• An Exploration of Our Four Foundational Investment Frameworks

Leveraging these frameworks, we can better understand why we might own Alphabet and why future value creation, and, by extension, share price appreciation, are highly likely.

Before I share the frameworks within which I believe Alphabet fits, I would encourage you to think about the frameworks and attempt to place Alphabet within the frameworks that you believe apply.

In my estimation, Alphabet fits within all four of my foundational investment frameworks. I will explore this contention with you in the bullets below:

• Vertically integrated product, capturing market share in stagnant mature industry: In some sense, Alphabet’s three primary businesses fit within this framework. Google search has siphoned advertising dollars away from traditional, less AI-driven channels and into AI/ML-driven search. YouTube has siphoned advertising dollars away from traditional channels, such as linear TV advertising and radio, and into ads displayed on user-generated content. GCP has siphoned dollars away from traditional, on-prem data storage and compute. In each of these instances, Alphabet has also employed vertical integration to create a more compelling product relative to the incumbent solutions from which it has been siphoning said dollars.
• Businesses that will execute a leveraged recapitalization in the coming years or are extremely disciplined with capital allocation via routine, robust share repurchase programs: As you know, this has been arguably my central bull thesis for the business, and it continues to be at the heart of my thesis for Alphabet. As of today, the business still has a rather de minimis debt burden, which gives it further latitude to aggressively repurchase shares, especially if its valuation remains depressed due to economic uncertainty and rising rates. In fact, for Alphabet, higher rates would actually be a net positive for shareholders, as higher rates would push down on the company’s valuation further, thereby allowing it to repurchase more shares at even more attractive valuations, which would serve to accelerate the growth of fcf/share, as the denominator in fcf/share is reduced at a faster rate when a company can buy back shares at a lower valuation.
• Quality cultures that breed innovation within the larger conglomerate: While this has been called into question for Alphabet, the recent success of GCP has demonstrated that the company remains capable of fielding new products successfully. I think, on some level, the reality is that new successful products are simply very rare. GCP’s success has been extremely heartening and represents one of many attempts at fielding new products working out.
• Growth through quality, moat-building acquisitions: Alphabet has also demonstrated an exceptional ability to make moat-building acquisitions, evidence for which can be seen in Alphabet’s purchase and ownership of Android and YouTube. That said, I am doubtful we will see very meaningfully successful acquisition in the future; not due to lack of competence, but rather due to regulatory scrutiny. While unfortunate for shareholders, this should serve as impetus for the C-Suite and board to further push hard on share repurchases, whereby capital is gainfully employed on behalf of shareholders in a disciplined fashion.

Alphabet’s Valuation

Here are my assumptions for Alphabet’s valuation:

Click to enlarge

I believe these to be reasonable assumptions. I would say they err on the conservative side. They are certainly not optimistic. Considering the “earth is set to digitally industrialize thesis,” alongside the growth of GCP, which could certainly hit $100B in sales one day, I think they are perfectly reasonable.

• Note: this was shared with my private community at $131/share, and I think it’s valuable to keep this original price, in that it may serve as a price target for accumulation for some. I still like it at $140/share, and a simple CAGR calculation produces the current projected returns from this price based on the year 10 price target presented below.

Notably, I used a terminal rate of 25x EV/fcf, which represents a premium to today’s valuation of about 20x EV/fcf.

The market presently prices many consumer package good companies [CPG] at a premium to Alphabet. I think this will be seen as improper as time goes on. Especially as GCP scales into a $100B+ revenue business, it is likely that Alphabet achieves a more durable, elevated multiple reflecting the strength and durability of its free cash flow, akin to Microsoft (MSFT) or Apple (AAPL), both of which offer free cash flow yields below the current 10 year risk free rate of about 4.5%.

Concluding Thoughts

As I reflect on the valuation of Alphabet, I am reminded that the market has largely priced in the quality of the business. I do think it offers a very attractive return profile for less risk averse investors today, who do not want to tolerate substantial volatility.

That said, I think, looking at the returns from March of 2020, the best time to buy Alphabet is during periods of market pessimism. In fact, it should likely be at the top of any investor’s “buy list for when the market collapses.”

Considering the yield curve remains inverted and interest rates could continue to rise, it’s not totally inconceivable for us to experience another substantial buying opportunity in the six to twelve months ahead.

Armed with today’s review and knowledge, I plan to keep you abreast of my thinking apropos of when to buy Alphabet.

Again, I think it’s very attractive for more conservative investors; however, I’m personally being patient with points of accumulation.

Thank you for reading, and have a great day.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of GOOGL, GOOG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Get started with us today!

The post Alphabet: The Third Supermajor appeared first on Up2info.com.

• Google has recently been sued by the Justice Department for allegedly engaging in monopolistic and anticompetitive behaviors.
• We believe that investors should not be worried about this litigation.
• Google is a high quality business with a massive user base and a pristine balance sheet.
• Google appears to be fundamentally undervalued and we view weakness as an opportunity for long-term investors to add more shares.

Thesis

Google (NASDAQ:GOOG) has long been the target of fines and lawsuits from governments around the world. Now the company is being sued by the Justice Department on monopoly concerns. Despite this, we believe that the company remains a buy on a fundamental basis. Additionally, a breakup could ultimately be value accretive for shareholders.

Antitrust Case

The Justice Department has officially sued Google for allegedly “monopolizing digital advertising technologies”. In short, the lawsuit alleges that Google has suppressed competition in the digital advertising market through anticompetitive and exclusionary conduct.

The Justice Department states:

To redress Google’s anticompetitive conduct, the Department seeks both equitable relief on behalf of the American public as well as treble damages for losses sustained by federal government agencies that overpaid for web display advertising.

It’s also possible that the government pushes for a breakup of the company. We will let the lawyers argue the merits of both this case and the 2020 Justice Department lawsuit regarding search. Our thesis is centered on the belief that the company is a buy here regardless of the outcome of ongoing litigation.

The Business

Google’s business can be broken up into three main categories.

Google Services – This segment is by far the largest and encompasses Google’s search business, YouTube ads, Android/hardware, and Google Ad Network.

Google Cloud – This segment encompasses Google Cloud Platform services, Google Workspace communication and collaboration tools, and other enterprise services.

Other Bets – This segment refers to Google’s “moonshot” projects.

While Google derives most of their revenue from advertising, the company has many potential growth engines in enterprise and some of their moonshots could finally pay off. This makes the company a reasonable growth pick even if their ad business faces economic/regulatory headwinds.

We believe that YouTube is the most valuable media asset on the planet and there may be additional ways to monetize the site in the future. At its core, YouTube is a content service where Google doesn’t have to pay for any of the content itself, instead rewarding content creators with a share of the ad revenue. This is a business model that any of the streaming companies would love to have and gives YouTube an advantage in both longevity and profitability. While most social media sites all have their day in the sun and eventually fade in popularity, YouTube has no real competitor. Importantly, the nature of the site means that as time goes on their content library becomes larger and the network effects continue to grow stronger. It seems unlikely that a relevant YouTube competitor will arrive anytime soon, and actually moving people away from YouTube would be a herculean effort. There are a few mega-cap tech companies that may be able to pull it off, but they probably won’t even try given how difficult the task would be.

In the event that the company gets broken up, we believe that it would ultimately be value accretive for shareholders over the long-term. Many of their business units can stand on their own and a breakup would help to reduce the lack of innovation that eventually plagues large tech companies. While there are also efficiencies that would be lost as a result of a breakup, the trade-off seems favorable in our mind.

For these reasons, we believe that antitrust is a non-factor. If the company gets fined and continues business as usual, there are adequate growth engines in place. If the company gets broken up, the value of the individual pieces could exceed the potential value of the combined entity over the long-term.

Valuation

Google appears to be trading at an attractive valuation considering their fundamental prospects. A forward PE of 23 is too low for a company of this caliber, especially given the size of their user base and pristine balance sheet. Google has just $13 billion of long-term debt and a large cash/cash equivalents balance of over $110 billion. For a tech company with such a massive user base and profitable business model, the market is discounting a lot of pessimism into the shares. While some of this discount is warranted, we believe that the stock should trade closer to a forward PE ratio of 30. While this may seem high, it’s important to consider just how dominant Google is. The company has billions of users and a business model that is highly lucrative (for the time being). Given how entrenched the company is in the daily lives of many people, it’s likely that they will find additional ways to monetize their user base even if their core ads business faces headwinds. The company can continue to grow in their enterprise segment, and their massive user base and the data they generate will likely become incrementally more valuable as AI applications become more widespread.

Price Action

Google has beaten both the Nasdaq 100 and S&P 500 so far this year. Given the fundamental picture, we believe that this outperformance can continue over the coming years.

Risks

One risk to the bullish thesis for Google is the potential for them to lose significant market share in their search and advertising businesses. This would pressure their profitability and could cause investors to exit the stock in droves, at least in the short-term.

Another risk is that regulatory actions damage the business model of Google so much that the business is permanently impaired. While a breakup of the company would be an acceptable outcome for shareholders, the real risk is if some sort of government action taken to enhance societal wellbeing damages the fundamentals of their business on a more permanent basis (instead of fines etc).

We view the risk/reward as being attractive at these levels and see weakness as an opportunity for long-term investors to buy more shares.

Key Takeaway

Regardless of what happens on the antitrust front, Google is a business that has multiple growth levers to pull. We believe that a breakup of the company would be fine for shareholders. Google appears to be undervalued on a fundamental basis and we believe weakness can be used by long-term investors to pick up more shares.

Thanks for taking the time to read this article!

Today’s question for the comments is: would you rather buy Google or Meta here and why?

Let us know your thoughts in the comments below.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of GOOGL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

UFD Capital Value Fund, LP has long exposure to GOOGL. UFD Capital, LLC manages a hedge fund and does not provide investment advice. Nothing contained in this article is investment advice or financial advice of any kind and investors should do their own research and consult a professional before making financial decisions. Nothing contained in this article should be interpreted as a solicitation to buy or an offer to sell securities.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Google: Don’t Worry About Antitrust appeared first on Up2info.com.

• Google is a cash cow and could offer investors a dividend in the future.
• The company has a forward P/E of 22.5X and offers investors upside to its current price target.
• GOOG has shown exponential growth in its financial metrics over the last decade and YouTube and Google Cloud continue to be strong growth drivers for the company.
• GOOG has an AA+ credit rating with $118 billion in cash on hand.

Introduction

There are several stocks that are considered cash cows. But just because they are cash flow machines, that doesn’t mean they share that cash with their shareholders. These include some of the most well-known companies in the world and I’ve written a few articles on some who could potentially pay a dividend. Of course this is all speculation, neither I nor anyone else for that matter knows what a stock’s management team is thinking. But just because a company is not known to pay dividends, that doesn’t mean one can’t be in its future. Especially if they’re a business used to generating enormous amounts of cash. One company known for this is none other than Alphabet Inc better known as Google (NASDAQ:GOOG). Who knows maybe one day Google’s management will read this article and decide to reward its shareholders with a dividend LOL.

Google The Business

This company needs no introduction. We’ve all used their services in one way or another. Some of us use them daily. Whether that’s searching the Internet, looking for directions, or using their apps or phones. Similarly to Apple (AAPL), it’s one of the few companies with a market cap over $1 trillion. Normally companies with market caps this large are cash-flow machines or what we call “cash cows”. And most of these use that cash to invest back into its business to continue growing.

Many have very high capital expenditures. And while this amount changes, depending on what the company is investing in or acquiring, I’m always wondering the same thing. “Will they ever reward shareholders with a dividend?” This could be wishful thinking. Some said Microsoft (MSFT), another cash cow, would never pay a dividend. But almost 30 years after IPO, the company paid its first dividend in 2003. So saying a dividend is not in the future of some of these companies is not unreasonable. And if one day they decide to, you all can thank The Dividend Collectuh haha.

Astronomical Growth

Over the last decade GOOG’s financials have grown astronomically. Revenue grew a whopping 409% while net income grew 372%. Both operating income and cash from operations grew 386% and 391% respectively. To put this into context I compare them to AAPL, Warren Buffett’s favorite, and largest stock by market cap currently.

During the same period Apple grew its revenue by 130.5% and net income by 170%. Both operating income and cash from operations grew by 144% and 128% respectively. To note, AAPL currently pays a quarterly dividend of $0.24 while Google does not.

Continued Growth in 2023 & Beyond

During Q2 earnings GOOG’s astronomical growth continued posting impressive numbers quarter-over-quarter and YOY. Revenue grew to $74.6 billion from $69.8 billion in Q1 while net income & operating income grew 22% & 25% respectively. Since its stock split in 2022, FCF has continued to grow exponentially, posting growth of more than 73% year-over-year, growing from $12.6 billion to $21.8 billion. Since Q2 of 2020, FCF grew 153% from $8.6 billion to its current. There was a slight decline in cash flow last year but that was due to increased CAPEX, where the company invested heavily into servers, data centers, and office facilities.

YouTube and Google Cloud both continue to be big growth drivers for the company. The introduction of YouTube Shorts has paid off. Channels that uploaded to Shorts daily grew 80% and they’re also seeing stellar growth internationally. Logged-in users grew to 2 billion, up from 1.5 billion a year ago, and revenue across products totaled nearly $40 billion.

Furthermore, Google Cloud revenue grew to $8 billion, up 28%, and operating profit grew $395 million. Additionally, as AI continues to grow, GOOG is continuing to incorporate this into their products. To note, this is Google’s 7th year as an AI-first company. In Q2 the company launched the Search Generative Experience, which uses the power of AI to make search more natural and intuitive.

As AI continues to take the world by storm, GOOG will continue to benefit greatly from this. The market is forecasted to show strong growth in the coming decade. With the release of ChatGPT by OpenAI last year, this introduced us to the realm of possibility with artificial intelligence. This is apparent as many companies have incorporated it into their business models.

Balance Sheet

Another thing the company continued to grow was their cash on hand. GOOG ended Q2 with $118 billion in cash, up from $115 billion in Q1. To put this into perspective, GOOG has enough cash on hand to buy 2 of the 5 largest banks in the U.S. by assets, U.S. Bancorp (USB) and Citigroup (C). Additionally, the company only has a minimal amount of debt with $11.9 billion so as you can see they have plenty of cash to cover it. This has decreased from $13.82 billion in 2020. Did I also mention they have one of the highest credit ratings at AA+? So shareholders shouldn’t have the slightest worry about high interest rates with this company.

So Is It A Buy?

GOOG has a current P/E of 29x and a forward P/E of 22.5x. Earnings are expected to grow 27% in the next year indicating the stock is currently undervalued. They’re current P/E is also lower that its peer Meta Platforms (META) who has a P/E of 35x. From here it offers investors some upside to its current price target of $148. With the emergence of AI and the expected growth, I think GOOG will continue to exceed analysts’ expectations in the coming years and therefore think it is a buy.

Risks

One of the good things about GOOG is they don’t face many risks in my opinion. The company recently reached an agreement for $93 million with the state of California for allegations that the communications giant used consumer profiling and advertising purposes without consent. As the company continues to incorporate AI into its products, this could potentially lead to more lawsuits as they become heavily dependent on artificial intelligence. They were also ordered to pay out more than $391 million to 40 states, but the company has since made significant improvements to its location tracking disclosures & user controls. Additionally, GOOG lost a patent lawsuit again Sonos (SONO) for wireless speakers.

Conclusion

GOOG is a cash flow machine that continues to grow it’s financials in every metric. They also have an ample amount of cash on hand and low debt which is impressive for a company as large as them. The company has been cash flow positive for years and with AI expected to grow twentyfold by 2030, maybe a dividend could be in the company’s future. As mentioned earlier, MSFT was public for 17 years before it paid its first dividend in 2003. So a dividend could be in the company’s future in the coming years.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Google: A Dividend Could Be In The Works For This Cash Cow appeared first on Up2info.com.