Google Stock Forecast for 2024: Should You Buy or Sell GOOG?

Explore the latest 2024 Google stock forecast to determine if GOOGL is a buy or a sell. It is expected to grow conservatively but still deliver a 20% ARR in 2026.

Author

Finset Research
September 26, 2024

📈 Trade Details

Straight-out google stock purchase at $161.49 (the price at the time of writing). 

🗒️ Quick Summary

NASDAQ Ticker: GOOG

Alphabet Inc. is a multinational conglomerate that specializes in various internet-related services and products. It operates primarily through three segments:

  1. Google Services: This segment includes a wide range of products and services, such as advertising, YouTube, Search engine business, Chrome, Gemini AI, Google Maps and so on.

  2. Google Cloud: This segment provides cloud computing services, including:

    • Infrastructure and platform services

    • Google Workspace (collaboration tools for enterprises like Gmail, Docs, Drive, Calendar, and Meet).

  3. Other Bets: This includes various health technology and internet services.

  1. Artificial Intelligence (AI) Investments:

    • Google has significantly increased its capital expenditures related to AI (large language model), indicating a strong focus on developing AI technologies. This includes hiring top AI talent and enhancing its AI capabilities across various platforms.

  2. Waymo's Autonomous Driving:

    • Waymo, Alphabet's autonomous driving division, has reported that it is now conducting over 100,000 paid rides weekly, showcasing advancements in its self-driving technology.

  3. Rehiring AI Talent:

    • Google has made headlines by rehiring a prominent AI expert for $2.7 billion, reflecting its commitment to leading in AI innovation.

  4. Regulatory Challenges:

    • Google has filed a complaint against Microsoft in the EU, which has implications for its cloud business and competitive practices in the tech industry.

🎯 What do we expect?

If the expected Earnings Growth materializes, the expected return is 53.11% in 2026 or 20.70% annualized.

🎯 What analysts think (Stock Price Forecast):

Avg. Price: $202.81 (+25% Gain)
Highest Price: $230 (+42% Gain)
Lowest Price: $151 (-6% Loss)

At the current price, Alphabet stock offers a decent margin of safety in the 20%+ range, which puts the stock in the buy zone at the current price.

🎯 What do financial models think:

Avg. Price: $164.38 (+1%)

Breakdown by Model:

  • 10Y DCF EBITDA Exit: $191.55 (+18.61%)

  • P/E Multiples: $153.12 (-5.18%)

  • Earnings Power Value: $82.07 (-49.18%)

  • EBITDA Multiples: $152.71 (-5.44%)

  • EBIT Multiples: $162.94 (+0.90%)

  • Revenue Multiples: $141.07 (-12.64%)

  • PS Multiples: $145.60 (-9.84%)

  • PB Multiples: $138.38 (-14.31%)

  • 5Y DCF EBITDA Exit: $168.24 (+4.18%)

  • 5Y DCF Growth Exit: $182.49 (+13.00%)

  • 5Y DCF Revenue Exit: $159.92 (-0.97%)

  • 10Y DCF Growth Exit: $183.83 (+13.83%)

  • 10Y DCF Revenue Exit: $182.36 (+12.92%)

  • Dividends: Multi-Stage: $245.36 (+51.94%)

  • Dividends: Stable Growth: $176.12 (+9.06%)

🕰️ Historical Performance vs. S&P500 ($10k Investment)

Here is the summary of your returns if you invested $10,000 in Google Stock vs. S&P 500. Despite impressive earnings growth, GOOG underperformed the S&P500 over the last three years, delivering 4.45% ARR vs. 6.90% for SPY.

🔮 Future Earnings Expectations

Future earnings expectations are solid. It is not as crazy as some of the other Magnificent Seven stocks, NVDA, or many other growth stocks, but GOOG is very well positioned to capitalize on its core businesses and continue delivering growth.

The Consensus EPS growth for GOOG is 13% in 2025 & 15% in 2026.

🚚 Key Drivers of future growth

  1. Increased Revenue from AI and Cloud Services:

    • Alphabet has been investing heavily in artificial intelligence and cloud computing. As these sectors grow, they are expected to contribute significantly to revenue, enhancing net income.

  2. Cost Management and Operational Efficiency:

    • Continued focus on managing costs, particularly in research and development (R&D) and operational expenses, can lead to improved margins. This would positively impact net income and, consequently, EPS.

  3. Share Buybacks:

    • If Alphabet continues its trend of share repurchases, this will reduce the number of shares outstanding, thereby increasing EPS even if net income remains stable.

  4. Growth in Advertising Revenue:

    • As the digital advertising market expands, Alphabet's core business is likely to see increased revenue, which will contribute to higher net income.

  5. Diversification of Revenue Streams:

    • Innovations in hardware (like Pixel devices) and other bets (like Waymo) may provide additional revenue streams, further supporting EPS growth.

🐂 Key Bullish Arguments

  • Attractive Valuation: Currently trading at a forward P/E of around 21x, Google is the most attractively valued stock within the FAANG group.

  • Regulatory Concerns are Short Term: Recent price corrections, driven by concerns about AI investments and regulatory concerns, may have been an overreaction, presenting a possible entry point for long-term investors.

  • AI Investments Could Drive Future Growth: Despite concerns over recent heavy AI-related CAPEX, Google's investments have the potential to create synergies with its existing products, which could enhance future profitability and growth.

  • Resilient Earnings: Despite increased CAPEX, Google's earnings growth remains robust, with retained earnings representing 4.4% of its market cap, suggesting strong underlying financial health.

Key Positive Future Outlooks from Alphabet Inc.'s Q2 2024 Earnings Call

  1. Strong Momentum in Search and Cloud:

    • #Sundar Pichai highlighted that Alphabet is experiencing "tremendous ongoing momentum in Search" and significant progress in Cloud, driven by AI initiatives. Cloud revenues crossed the $10 billion mark for the first time, with a quarterly operating profit exceeding $1 billion.

  2. AI Infrastructure and Generative AI Solutions:

    • The company reported that its AI infrastructure and generative AI solutions for Cloud customers have generated billions in revenues and are being utilized by over 2 million developers—this positions Alphabet uniquely for future growth in AI.

  3. Innovative Product Development:

    • Alphabet is innovating across all layers of the AI stack, from chips to agents. The introduction of AI overviews in Search has led to increased user engagement, particularly among younger users aged 18 to 24.

  4. YouTube's Growth and Strategy:

    • YouTube remains the number one platform for streaming watch time in the US, with views of YouTube Shorts on connected TVs more than doubling year-over-year. The platform is focused on connecting creators with audiences and monetizing through ads and subscriptions.

  5. Investment in Technical Infrastructure:

    • The company is committed to investing in its technical infrastructure, with a focus on AI. This includes a new data center in Malaysia and expansion projects in the US. The latest AI accelerator, Trillium, is noted for its performance and energy efficiency.

  6. Operational Efficiency and Cost Management:

    • Alphabet is focused on "durably reengineering" its cost base, which has led to improved operating margins. The company is also optimizing its real estate portfolio and leveraging AI to enhance operational efficiencies.

  7. Future Growth in Subscriptions and Devices:

    • The subscription business continues to grow, driven by YouTube TV and YouTube Music. The upcoming product launches in the Pixel line are expected to boost revenues.

  8. Waymo's Progress:

    • Waymo has achieved significant milestones, including over 2 million trips and 20 million fully autonomous miles driven. The company is committed to further investments in autonomous driving technology.

🐻 Key Bearish Arguments

  1. Economic Uncertainty:

    • The company faces ongoing economic headwinds that have led to a pullback in advertising budgets. This uncertainty affects both consumer and business spending, which could impact revenue growth across its services.

  2. Increased Competition:

    • Competition in the digital advertising space is intensifying, especially from companies like Microsoft, which is aggressively pursuing market share in search and advertising. This competitive pressure could lead to reduced market share and pricing power for Alphabet.

  3. Regulatory Challenges:

    • Alphabet is subject to increasing scrutiny from regulators globally. Antitrust investigations and potential legal actions could lead to fines or restrictions that may hinder its business operations and growth strategies.

  4. Dependence on Advertising Revenue:

    • A significant portion of Alphabet's revenue is derived from advertising. Any downturn in the advertising market, as seen with the decline in network advertising revenues, could adversely affect overall financial performance.

  5. Challenges in AI Integration:

    • While Alphabet is investing heavily in AI, the integration of AI technologies into existing products and services poses challenges. There is a risk that the anticipated benefits of AI may not materialize as quickly as expected, impacting growth.

  6. Cost Management and Efficiency:

    • Although Alphabet is focused on reengineering its cost base, the company has faced challenges in managing expenses effectively. Rising operational costs, particularly in data centers and R&D, could pressure margins.

  7. Market Saturation:

    • In certain segments, such as search and online advertising, market saturation may limit growth opportunities. Alphabet may find it increasingly difficult to attract new users or advertisers as competition intensifies.

  8. Slower Growth in Cloud Services:

    • Despite recent growth, the Google Cloud segment is experiencing a moderation in consumption growth as customers optimize their spending. This trend could affect future revenue growth in the cloud business.

Conclusion

Although AI investment is a heavy burden on CAPEX right now, it will eventually pay off. The emergence of generative artificial intelligence has posed a number of risks, but Google has a diverse product line that will all benefit from more capable AI tech. YouTube and Clouds businesses continue to deliver solid growth and future prospects. 

Antitrust and regulatory concerns that suppressed the stock price in recent months are actually a positive development for long-term investors.

"Bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price." - Warren Buffett

Disclaimer

I currently do not have an active position in any of the companies mentioned above but am thinking of initializing in the next few days. As usual, the information provided in this newsletter is for general informational purposes only. All information in the newsletter is provided in good faith, however, we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of any information. The content of this newsletter does not constitute financial advice, investment advice, or any other type of advice and should not be relied upon for any individual circumstances. We are not financial advisors, and you should consult with a professional before making any investment decisions. Any action you take upon the information in this newsletter is strictly at your own risk, and we will not be liable for any losses and/or damages in connection with the use of our newsletter.

Happy Investing,
Andy