Should You Pick Alphabet Stock At $170?

Alphabet stock (NASDAQ: GOOG) saw a marginal growth of over 1% last week, despite it reporting a solid quarter. The company reported revenue of $88.3 billion and earnings of $2.12 per share, both metrics well above the consensus estimates of $86.3 billion and $1.85, respectively. The increased demand for AI solutions drove the growth for the company. However, much of the positives appears to be priced in for its stock. In this note, we discuss the key takeaways from Alphabet’s results, its stock performance, and valuation. 

How Did Google Fare In Q3?

Google’s revenues of $88.3 billion in Q3 reflected a 15% y-o-y gain. The growth was led by its cloud business, with segment sales up a solid 35% to $11.4 billion. Google search revenue was up 12% to $49.4 billion, and YouTube ad revenue was also up 12% to $8.9 billion y-o-y. The company’s self-driving car unit — Waymo — is now seeing 150,000 weekly paid rides. Waymo could be the next big thing for Google. See how Waymo could be worth $5 trillion. 

Not only did Alphabet see its revenue rise, its operating margin expanded 450 bps y-o-y to 32.3% in Q3. Higher revenue and margin expansion led to a 37% rise in the bottom line to $2.12 per share, up 37% y-o-y. Looking forward, we expect the company to post revenue of $96 billion in Q4, and earnings to be around $2.15 per share.

What Does This Mean For GOOG Stock?

While Alphabet’s results were solid, its stock price appears to have little room for growth, in our view. We estimate Google’s valuation to be $182 per share, reflecting only 6% upside from its current levels of over $170. Our forecast is based on 23x expected earnings of $8.05 per share in 2024. The 23x figure is higher than the stock average P/E ratio of 18x seen over the last three years. GOOG stock is trading at a  multiple lower than some of its peers, with META trading at 26x and AMZN at 40x forward expected earnings. That is because there remains a key risk for Alphabet.

Google is facing antitrust cases, alleging the company to monopolize the marketplace and the general search services. The remedies could include a breakup of the company, which seems unlikely for now, regulatory oversight, and restrictions on businesses, among others. None of these would bode well for Alphabet’s businesses in the long term. As such, despite a strong growth visibility in the cloud business, on the back of AI demand, and continued ad revenue gains, we think that the stock may not see any meaningful growth in the near term.

GOOG stock has seen over 20% gains this year, broadly aligning with the returns for the S&P500 index. However, the change in GOOG stock over the recent years has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for GOOG stock were 65% in 2021, -39% in 2022, and 59% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it 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.

While GOOG stock looks like it has little room for growth, it is helpful to see how Google’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 11/4/2024
[2] Cumulative total returns since the end of 2016

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