Alphabet (Google) Stock Underperformed The Consensus In Q3, What’s Next?

Alphabet (Google)’s stock (NASDAQ: GOOG) has lost approximately 37% YTD as compared to the 19% drop in the S&P500 index over the same period. That said, at its current price of $90, the stock is trading 32% below its fair value of $133 – Trefis’ estimate for Google’s valuation. The global technology giant missed the consensus estimates in the third quarter of 2022. It reported total revenues of $69.1 billion – up 6% y-o-y. The Google advertising revenues (including Google search, YouTube ads, and Google network) increased 3% y-o-y to $54.5 billion in the quarter, followed by a 38% jump in the Google cloud unit. Further, paid clicks and impressions increased by 8% and 3%, respectively. On the flip side, both the cost-per-click and cost-per-impression decreased by 5% y-o-y. On the cost front, the cost of expenses and research & development costs as a % of revenues witnessed an unfavorable increase, leading to a drop in operating margin from 32% to 25%. The profitability numbers further suffered due to a decrease in other income from $2 billion to -$902 million. Overall, it resulted in a 27% drop in net income to $13.9 billion.

The company’s top line increased 13% y-o-y to $206.8 billion in the first nine months of FY 2022. It was mainly driven by a 12% growth in Google advertising revenues, followed by a 39% rise in the Google cloud business. However, higher expenses led to a 16% drop in the net income to $46.3 billion despite growth in the top line. Notably, the revenue growth rate slowed down in the first three quarters of 2022 due to the challenging macroeconomic conditions and reduced ad spending.

Moving forward, Google’s revenues are forecast to touch $280.9 billion in FY2022. Further, its net income margin is likely to decrease from 29.5% to around 21.5% in the year, leading to a net income of $60.3 billion. This coupled with an annual EPS of $4.63 and a P/E multiple of just below 29x will lead to a valuation of $133.

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[1] Month-to-date and year-to-date as of 11/2/2022
[2] Cumulative total returns since the end of 2016

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