Alphabet Stock Fell 5% In A Day, Why?

Alphabet (Google)’s stock (NASDAQ: GOOG) dropped 5% on 24th July, as compared to a 2% decrease in the S&P500 index. Notably, Alphabet’s peer Meta Platforms (NASDAQ: META) was down 5.6% on 24th July. The price fell after GOOG stock declared second-quarter results, missing the consensus estimates for YouTube advertising revenues. Further, it was also driven by investor concerns over return on investment on capital expenditure related to artificial intelligence (AI) infrastructure. Overall, at its current price of $174, the stock is trading 3% below its fair value of $179 – Trefis’ estimate for Google’s valuation. 

Amid the current financial backdrop, GOOG stock has seen extremely strong gains of 105% from levels of $85 in early January 2021 to around $175 now, vs. an increase of about 50% 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 posted net revenues of $84.7 billion in the second quarter of FY 2024 – up 14% y-o-y. It was mainly due to a 12% growth in Google Services and a 29% rise in Google Cloud revenues. The Google Services unit benefited from a 14% gain in Google Search & other revenues, followed by higher Google subscriptions, platforms, and devices income. On the expense front, total expenses as a % of revenues witnessed a favorable decrease in the quarter, leading to an operating margin of 32% vs 29%. Overall, the net income improved 29% y-o-y to $23.6 billion.

The company’s top line grew 9% y-o-y to $307.4 billion in FY 2023, primarily because of growth in Google search & other, Google Cloud, and Google subscription, platform & devices businesses. Further, operating margin slightly increased in the year, leading to a net income of $73.8 billion – up 23% y-o-y.

Moving forward, we expect the same trend to continue in the third quarter. Overall, Google’s revenues are forecast to touch $325 billion in FY2024. Further, its net income margin will likely improve in the year, resulting in a net income of $86.5 billion. This coupled with an annual EPS of $7.01 and a P/E multiple of just below 26x will lead to a valuation of $179.

[1] Returns as of 7/25/2024
[2] Cumulative total returns since the end of 2016

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