Alphabet Stock (NASDAQ:GOOGL)
Alphabet (NASDAQ:GOOGL) has increased its buyback program. In the previous twelve months, the company had already spent around $60 billion on share buybacks. With $85 billion allocated to buybacks during the previous four quarters, Apple (NASDAQ:AAPL) is in the lead. The management of Alphabet probably wants to follow Apple’s lead and gradually expand share buybacks as free cash flow rises over time. Apple has eliminated 40% of its outstanding stock since the start of its buyback program, which has aided in raising the EPS by 66% on a stand-alone basis.
The management may have changed the buyback rate as a result of the recent decline in Alphabet’s share price over the past quarter.
If Alphabet keeps up its present buyback pace, it will be able to retire 5% of its outstanding shares at the current price in 2023. While buybacks by themselves do not ensure that a firm will be able to beat the overall market, Alphabet’s strong fundamentals combined with the benefits of buybacks can undoubtedly improve the stock’s long-term growth trajectory.
Taking a Position
A repurchase program has been used by several of the big IT corporations as a way to return enormous cash reserves to their owners. The companies with the highest repurchase programs are Apple, Microsoft (NASDAQ:MSFT), Meta (NASDAQ:META), and Alphabet.
However, in recent quarters, Microsoft and Meta have scaled back the buyback program in an effort to save money amid the larger IT downturn.
Microsoft and Meta buyback rates are falling, but Alphabet and Apple are speeding up their buyback programs.
In the most recent quarter, Alphabet stock price experienced a significant decline. Whether the management decides to scale back the buybacks or keep them at the current pace will be put to the test.
The Unique Position of Alphabet
Because it generates solid free cash flows and there aren’t many industries that demand big investments, Alphabet is in a special position.
In order to make significant investments in virtual reality, Meta must make financial sacrifices. To catch up to Amazon’s cloud operations in terms of market share, Microsoft is likewise making significant investments. Amazon is making investments in its shipping and streaming entertainment offerings. Alphabet, on the other hand, generates large free cash flows without needing to make comparable investments.
Alphabet may expand investment in Other Bets like Waymo, but judicious investment in these programmes has its limits.
Out of a total operating income of $17 billion in the previous quarter, the company previously reported a loss in Other Bets of $1.6 billion.
The buyback program’s potential future reach is impossible to predict. The direction of the company’s stock price and free cash flow may also be a factor in the management’s response, which has not been made explicit. The management may have more flexibility to increase buybacks if free cash flow continues to expand steadily. Alphabet could end up spending close to a trillion dollars on buybacks in this decade, it’s possible.
This can eliminate 40% to 50% of the outstanding stock and result in a decade-long increase in EPS of 70%. The buyback program by itself might boost the EPS by 6% to 7% on an annualized basis.
When assessing Alphabet stock’s long-term potential, this should be taken into account.
Effect on the Stock’s Trajectory
Buybacks by themselves haven’t been enough to outperform the broader market in terms of returns. Several stocks, like Exxon (NYSE:XOM), significantly relied on buybacks. Long-term returns for them have not, however, exceeded those of the S&P 500. Consequently, it is crucial to consider the company’s foundations. Alphabet has effectively survived the decline brought on by the epidemic and the Great Recession. The decrease in advertising expenditures brought on by recent inflationary pressures is likely to be transitory, and Alphabet will resume its YoY growth track after it deals with softer comps from the prior year.
Additionally, Google Cloud generated $7 billion in revenue in the most recent quarter or $28 billion annually. Compared to the average operating margin of 30% for Amazon’s (NASDAQ:AMZN) AWS, the operating margin in this area is negative 10%. Given that Google has higher scale efficiencies, it is very possible that it will be able to close this enormous margin disparity.
Despite the slump in the technology sector, Alphabet expects robust future revenue growth. The forward PE ratio of the company is currently modest at 18.7, down from nearly 30 a year ago.
The stock may produce above-average returns over the coming several years thanks to the solid long-term fundamentals and the buybacks’ strong tailwind.
Investor Key Findings
Alphabet has been making significant investments in its buyback plan. One of the main causes is that the corporation has a tonne of cash on hand and doesn’t need to invest it in any brand-new projects. Alphabet may invest close to a trillion dollars in buybacks over the course of this decade, which could boost EPS by 6% to 7% yearly.
With Google Cloud exhibiting excellent growth and a yearly revenue rate of $28 billion, the company’s fundamentals are also pretty robust. As the margin difference between Amazon and Microsoft narrows, Google Cloud may become yet another source of revenue for the business. The challenges facing the advertising industry are probably transitory, and as soon as the market’s demand picks up, the company should begin to experience solid double-digit growth. The stock is a good long-term buy-and-hold choice because it is now trading at a reasonable price point.
Featured Image: Google Images @ alamy