Alphabet (NASDAQ: GOOG) recently released its Q4 results, with revenues missing and earnings exceeding the street estimates. It reported sales of $96.5 billion and earnings of $2.15 per share, compared to the consensus estimates of $96.6 billion and $2.13, respectively. Although Google continued to benefit from its cloud business, the segment sales were below expectations. The company remains committed to its AI strategy, and will spend $75 billion in capital expenditures this year. The stock declined following the earnings release, as investors reacted negatively to revenue falling short of expectations and capital expenditures exceeding forecasts.
GOOG stock, with 37% returns since the beginning of 2024, has outperformed the S&P 500 index, up 27%. Investors are optimistic about the potential AI-driven growth for Google’s advertising business. But, if you want upside with a smoother ride than an individual stock, consider the High-Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.
Google’s revenues of $96.5 billion in Q4 reflected a 12% y-o-y gain. The growth was led by its cloud business, with segment sales up a solid 30% to $11.96 billion. Google search revenue was up 12.5% to $54 billion, and YouTube ad revenue was also up 13.8% to $10.5 billion.
Not only did Alphabet see its revenue rise, its operating margin expanded 500 bps y-o-y to 32% in Q4. Higher revenue and margin expansion led to a 31% rise in the bottom line to $2.15 per share. Looking forward, we expect the company to post revenue of $389 billion and earnings to be around $9.07 per share in 2025.
With mixed results and a high capex plan, GOOG stock plunged 7% post the results announcement. Even if we look at a slightly longer time frame, the increase in GOOG stock over the last four-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500.
In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has comfortably outperformed the S&P 500 over the last four-year 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.
Given the current uncertain macroeconomic environment around rate cuts and ongoing trade wars, could GOOG face a similar situation as it did in 2022 and underperform the S&P over the next 12 months — or will it see a strong jump? We estimate Google’s valuation to be $200 per share, close to its current market price of around $193. Our forecast is based on a 22x expected earnings of $9.07 per share in 2025. The 22x figure is higher than the stock’s average P/E ratio of 18x seen over the last five years. Given Alphabet’s promising earnings growth potential from its AI initiatives and the ongoing momentum in its cloud division, the company appears to warrant a premium valuation multiple, compared to its historical average. Notably, GOOG stock trades at a valuation multiple much lower than some of its cloud peers, with AMZN stock trading at 38x and MSFT stock trading at 32x forward expected earnings. This difference can be attributed to the antitrust cases that Google is facing, alleging the company monopolized the marketplace and the general search services.
While GOOG stock looks like it is fairly priced, 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.
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