After 50% Move This Year Alphabet Stock To Outperform The Estimates In Q3

Alphabet (NASDAQ: GOOG) is scheduled to report its fiscal Q3 2023 results on Tuesday, October 24, 2023. We expect Alphabet to top the consensus estimates of earnings and revenues. The company surpassed the street expectations in the last quarter, with net revenues increasing by 7% to $74.6 billion. It was primarily driven by growth in Google search, Google Cloud, and a Google other unit. We expect the Q3 result to be on similar lines. Our interactive dashboard analysis on Alphabet’s (GOOG) Earnings Preview has more details. 

Amid the current financial backdrop, GOOG stock has seen extremely strong gains of 55% from levels of $90 in early January 2021 to around $140 now, vs. an increase of about 15% for the S&P 500 over this roughly 3-year period. However, the increase in GOOG stock has been far from consistent. Returns for the stock were 65% in 2021, -39% in 2022, and 59% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 14% in 2023 (YTD) – indicating that GOOG underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the Communication Services sector including META, CMCSA, and TMUS, and even for the megacap stars TSLA, MSFT, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could GOOG face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

Our forecast indicates that Alphabet’s (GOOG) valuation is $135 per share, which is 4% below the current market price of around $141. 

(1) Revenues expected to top the estimates

Alphabet’s (GOOG) revenues grew 5% y-o-y to $144.4 billion in the first two quarters of FY2023. 

• The company generates close to 60% of the total revenues from Google search & other category. It increased just 3% over the same period, due to a cut in digital spending by businesses because of tough macroeconomic conditions. We expect the same pattern to continue in Q3.
• Further, Google Cloud and Google other segments also posted higher revenues in the first half. We expect the momentum to continue in Q3.
• Overall, we forecast Alphabet’s revenues to touch $300.7 billion in FY 2023.

Trefis estimates Alphabet’s fiscal Q3 2023 net revenues to be around $73.85 billion, marginally above the $72.12 billion consensus estimate.

(2) EPS to edge past the consensus estimates

Alphabet Q3 2023 adjusted earnings per share (EPS) is expected to be $1.41 per Trefis analysis, 3% above the consensus estimate of $1.37. The adjusted net income increased 3% y-o-y to $33.4 billion in the first half of FY 2023. Notably, the growth was lower than the increase in the top line. It was due to an unfavorable rise in the operating expenses as a % of revenues from 71.3% to 72.8%. We expect the Q3 results to follow the same trend. Overall, Alphabet is likely to report an annual GAAP EPS of $5.30 for the full-year 2023. 

(3) The stock price estimate is 4% less than the current market price

We arrive at Alphabet’s (GOOG) valuation, using an EPS estimate of $5.30 and a P/E multiple of just above 25x in fiscal 2023. This translates into a price of $135, which is 4% below the current market price. 

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year  

[1] Month-to-date and year-to-date as of 10/18/2023
[2] Cumulative total returns since the end of 2016