I had recommended Alphabet (GOOG) as a great long-term buy between $150 and $170 on several occasions.
Last evening, Google knocked it out of the park with really stellar results. I bought more shares this morning, and am reiterating a Buy.
I believe analysts’ consensus earnings are a bit conservative and Google will continue to beat estimates with better growth and operating margins.
Google’s earnings quality is better than several tech giants for the following reasons.
- It has a near monopoly in Search
- Market leadership in media with YouTube.
- A strong first-mover advantage with Waymo.
- A fast-growing Google Cloud business, third only to and catching up with Azure and AWS.
Its earnings and growth are sustainable, thus it deserves a better valuation and multiple.
Let’s take a closer look at Q3 earnings.
Q3 GAAP EPS came in at $2.12 per share, beating expectations of $1.85 per share $0.27, or 14% – This was a substantial beat.
Revenue of $88.3Bn (+14.9% Y/Y) beat by $2.05B or 3%.
Consolidated Alphabet revenues in Q3 2024 increased 15%, or 16% in constant currency, YoY to $88.3Bn reflecting strong momentum across the business.
Google Services revenues increased 13% to $76.5 billion, led by strength across Google Search & other, Google subscriptions, platforms, and YouTube ads.
Total operating income increased 34% and operating margin percent jumped a huge 4.5% to 32%.
Google Cloud revenues grew a whopping 35% to $11.4Bn led by accelerated growth in Google Cloud Platform (GCP) across AI Infrastructure, Generative AI Solutions, and core GCP products, with record operating margins of 17% as the cost per AI query decreased by 90% over the past 18 months.
Cloud titans Amazon (AWS) and Microsoft (Azure) have commanded huge valuations for their cloud computing businesses; with Google Cloud growing at 35%, it should continue to narrow the gap over the next 5 years. Also importantly, AWS and Azure have operating margins over 30%, and should Google continue to scale and leverage their existing fixed costs, they can reach the same margins. I also believe as they get better at AI, they should be able to charge more.
Based on consensus analysts’ estimates Alphabet’s EPS should grow to $11.60 in 2027 from $5.80 in 2023 – that’s an annual growth rate of 18%. Comparatively, Apple‘s estimated EPS growth through FY2027 is slower at 14%, and it sports a P/E of 33 compared to Google’s 22. Alphabet’s P/E is closer to the S&P 500’s P/E of 21!
I believe this is too low, and there is a lot of potential for its stock to appreciate just on the lower valuation.
Besides the strong EPS, a lot of Google’s expenses are noncash depreciation and amortization and their cash flow margins are strong. They generated operating cash of $31Bn on $88Bn last quarter, or a 35% cash flow margin.
The antitrust regulation will remain a possible negative on Alphabet, but the final decision is still years away as Alphabet vigorously appeals the decision.
I recommend Alphabet as a buy at $176