Alphabet: A Proven Resilient Stock Selling At A Discount, which I wrote about two years ago, anticipated Google’s (NASDAQ:GOOG) stock doubling in five years. In that post, I repeated that investors searching for a high-quality stock in this downturn should consider Alphabet (NASDAQ:GOOGL), Google’s parent firm. I also explained that the company has a long-term business model and that its revenue streams had proven resilient in a downturn, citing the last bear market, the credit crisis of 2008-2009, when Google’s (as it was then known) revenue increased 42% from $16.6 billion in 2007 to $23.6 billion in 2009. Google’s advertising income, now its main revenue stream, increased 33.6% during the same period.
The stock has done exactly that two years later. Nonetheless, Google’s stock has more space to grow despite more than tripling its share price. According to the company’s most recent quarterly report, dated July 26th, quarterly revenues increased 13% yearly and 17% yearly. I believe Google can continue to expand in the high teens with its expenditures in R&D and other growth areas such as AI, Search, and Cloud. The corporation recruited almost 10,000 new personnel in the previous quarter, demonstrating how long-term the company is thinking.
These investments are reflected in their costs increasing 18% in the prior quarter, resulting in a 14% decrease in net income. Nonetheless, the corporation earned over $12 billion in free cash flow in the quarter and a total of $65 billion in the previous 12 months. Consequently, I am not concerned about the recent drop in earnings from the previous quarter as long as they continue to reinvest in their business divisions to drive development.
Another advantage is Google’s operating margin. With an operating margin of 29%, the corporation maintains margins near the all-time high, indicating operational efficiency. I predict this margin to fall modestly from its peak over time.
Analysis
Buy Rating: Using the same technique as my two-year research, I have a Buy rating on Alphabet stock with a five-year target price of $240 per share. According to my study, the firm can attain a 25% net margin over the next five years, which is lower than the 29% it presently earns.
According to Statista, with worldwide online advertising expected to reach $876 billion in 2026, Google has the potential to make $368 billion in advertising revenue by maintaining its 42% market share. Google produced $209 billion in total advertising income as of the end of 2021, which included Search and YouTube. To produce $368 billion in advertising sales, the corporation would have to increase 76% over the next five years, which is a 15% annual growth rate and less than the 18% projected in my estimate.
The remaining $129 billion in income would come from Google’s non-advertising businesses and Google Cloud, which would need to expand at their current 35% annual pace to hit the overall target revenue of $497 billion in five years.
Bottom Line
The stock is now selling at a good price of 20 times earnings. Over this period, I expect the stock’s price-to-earnings ratio (P/E) to rise from 20 to 25.
With the board of directors allowing an extra $70 billion in share repurchases under its share buyback program, I estimate a 583 million drop in outstanding shares based on current prices, which should enhance returns by 10%.
While there is a risk that Google will miss its revenue targets due to inflation, recession, and other macro and global economic factors, it is important to remember that the company was able to grow and double its stock price over the last two years despite the economic uncertainties associated with the pandemic. As a result, I believe Google’s stock has additional upward potential.
Featured Image : Megapixl © Thomas1187
