Alphabet Stock IS Beating S&P500 By 11% YTD, Where Is It Headed?

Alphabet (Google)’s stock (NASDAQ: GOOG) has gained 26% YTD as compared to the 15% rise in the S&P500 index over the same period. Notably, Alphabet’s peer Meta Platforms (NASDAQ: META)is up 40% YTD. Overall, at its current price of $178, GOOG stock is trading 6% above its fair value of $168 – Trefis’ estimate for Google’s valuation. 

Amid the current financial backdrop, GOOG stock has seen extremely strong gains of 100% from levels of $90 in early January 2021 to around $180 now, vs. an increase of about 45% 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. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – 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, NFLX, 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?

The technology giant surpassed the consensus estimates in the first quarter of 2024, with revenues increasing 15% y-o-y to $80.54 billion. It was mainly due to a 28% jump in the Google cloud unit, followed by a 13% gain in the Google advertising (including Google search, YouTube ads, and Google network) category. On the expense front, total expenses as a % of revenues witnessed a favorable drop in the quarter, leading to an operating margin of 32% vs 25%. Altogether, the net income improved 57% y-o-y to $23.7 billion.

The company’s top-line increased 9% y-o-y to $307.4 billion in FY 2023. It was driven by strong growth in Google search & other, Google Cloud, and Google subscription, platform & devices businesses. Further, the operating margin slightly improved in the year. This led to a 23% y-o-y rise in the net income to $73.8 billion.

Moving forward, the consensus estimates for Q2 2024 revenues and earnings are $78.28 billion and $1.71 respectively.

Overall, Google’s revenues are forecast to touch $327.60 billion in FY2024. Further, its net income margin is likely to see some improvement in the year, resulting in a net income of $84.7 billion. This coupled with an annual EPS of $6.87 and a P/E multiple of just above 24x will lead to a valuation of $168.

[1] Returns as of 6/21/2024
[2] Cumulative total returns since the end of 2016

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