With a 7% year-to-date (YTD) decline, Google’s stock (NASDAQ:GOOG) has underperformed the S&P 500, which is up 2%. This underperformance is partly due to increased regulatory scrutiny and increased investor concerns regarding the potential for AI to disrupt Google’s search business.
Nevertheless, GOOG stock has doubled since early 2023, driven by three key factors:
- a 47% rise in the Price-to-Sales (P/S) ratio: The P/S ratio increased from 4.1x to 6.1x over the same period.
- a 27% rise in revenues: Revenues climbed from $283 billion in 2022 to $360 billion currently.
- a 7% fall in total shares outstanding: This reduction is a result of nearly $200 billion in share repurchases since 2022.
We’ll explore these factors in greater detail. While GOOG stock has seen impressive gains, if you desire growth with a less volatile experience than that of a single stock, consider the High Quality portfolio, which has surpassed the S&P, achieving >91% returns since inception. Additionally, check out – QUBT Stock Is Up 80% In A Month. What’s Happening With Quantum Computing?
What’s Behind The Revenue Growth?
Google’s revenue growth in recent years has been significantly boosted by its cloud business, which has shown strong momentum with a 64% increase in sales between 2022 and 2024. The company’s core search business is also performing well, driven by higher advertising revenues, a trend expected to continue. Notably, Google’s search ad revenues are up 22%, while YouTube ad revenue has increased by 24% over the same period.
Artificial intelligence has emerged as a crucial growth driver across Google’s services; for instance, AI-powered features like AI Overviews and Circle to Search have enhanced user engagement in Search, and Google’s AI-powered Cloud portfolio has seen increased customer demand. This period highlights Google’s success in diversifying its revenue streams while maintaining its dominance in advertising, with cloud services and AI integration being the primary drivers of accelerated growth. An example of this diversification and growth is Waymo, Google’s autonomous driving subsidiary, which is now providing over 250,000 paid rides per week across Phoenix, San Francisco, Los Angeles, and Austin. See – While Tesla Talks, Waymo Drives.
What’s Driving The Valuation Higher For GOOG Stock?
Since 2022, Google’s operating margin has expanded by 600 basis points, rising from 26.5% to 32.7%. This improvement is a direct result of several key factors: the maturation and increasing profitability of Google Cloud, the continued strength and AI-enhanced monetization of its core advertising business, and a concerted effort to manage costs and improve operational efficiency across the entire company.
This improved profitability, combined with strong sales growth and the rising demand for cloud infrastructure amid the AI boom, has positively shifted investor perception. Consequently, the company’s price-to-sales (P/S) valuation multiple has grown by 47%, climbing from 4.1x trailing revenues in 2022 to the current 6.1x.
But What Next? Is GOOG Stock A Buy At $180?
At its current trading price of around $180, GOOG stock’s price-to-sales (P/S) ratio of 6.1x is closely aligned with its five-year average of 6.2x. See Google’s Valuation Ratios for more details.
However, there are compelling reasons to believe this valuation multiple could climb higher. Google’s strategic AI investments are set to significantly expand its business. Google Cloud will benefit from increased enterprise demand for AI, boosting infrastructure and platform sales. Concurrently, AI will enhance Search and advertising through improved relevance and targeting, leading to greater user engagement, higher ad click-through rates, and better advertiser ROI. Additionally, AI-powered features in YouTube and other services are expected to drive user retention and premium subscription growth.
But There Are Risks
Despite its promising outlook, Google stock isn’t without its risks. During the inflation-driven market downturn in 2022, GOOG stock experienced a significant drop of 44.6%, falling from a high of $150.71 on November 18, 2021, to $83.49 on November 3, 2022. This contrasted with a milder peak-to-trough decline of 25.4% for the S&P 500 during the same period. While the stock fully recovered to its pre-crisis peak by January 25, 2024, a similar pattern emerged earlier this year amid trade war anxieties, where the stock dropped around 30% compared to a 19% peak-to-trough decline for the S&P 500. Our dashboard on Buy or Sell Google Stock has more details.
Beyond broader market and geopolitical challenges, Google faces company-specific risks related to its substantial capital expenditures. Since 2022, Google has invested an astonishing $134 billion in CapEx. A critical question looms: what if these considerable investments fail to deliver the anticipated returns? Additionally, there’s the regulatory risk, with the Department of Justice actively pushing for Google to be split to address alleged monopolistic practices in the search market. See – Google’s $1 Trillion Lawsuit.
Indeed, regulatory risk is just a minor facet of the risk assessment framework we utilize while creating the Trefis High Quality (HQ) Portfolio. This portfolio encompasses 30 stocks and has consistently outperformed the S&P 500 over the past four years. What accounts for this? As a whole, HQ Portfolio stocks have generated superior returns with less risk compared to the benchmark index; offering a smoother ride, as illustrated in HQ Portfolio performance metrics.
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