Alphabet Faces Challenges Amid Growth: What’s Next for Google Stock?

Alphabet stock (NASDAQ: GOOG) has attracted attention recently, as the Department of Justice suggested measures to end Google’s monopoly, including the potential sale of Google Chrome and sharing data with competitors. The trial for these proposals is set to commence in April 2025, with Google able to present its own proposals in December. The company is grappling with antitrust cases, and remedies could be severe, potentially including the sale of its Android platform. This uncertainty has impacted GOOG’s stock performance. Over a longer duration, GOOG stock has risen 23% from $144 in early 2022 to its current value of $177, primarily due to:

1. a 32% increase in revenue from $258 billion in 2021 to $340 billion now;
2. a 8% decrease in total shares outstanding, as a result of $171 billion spent on share repurchases; and
3. a 14% decline in the company’s P/S ratio, now at 6.5x, down from 7.6x in 2021, reflecting investor concerns surrounding the antitrust case against Google.

Key Factors Behind Google’s Revenue Growth

Google’s revenue growth over the recent years has been significantly propelled by its cloud business, which has seen a remarkable 72% surge in sales from 2021 to 2023. However, it only accounts for 11% of total sales, compared to 56% from Google’s search business. The search sector remains strong, bolstered by AI integration that is anticipated to continue driving advertising revenue upward.

In its latest quarter, Google’s revenue of $88.3 billion in Q3 marked a 15% year-over-year increase. The growth was particularly driven by the cloud segment, which saw a 35% rise to $11.4 billion. Google search revenue climbed by 12% to $49.4 billion, while YouTube ad revenue also rose 12% to $8.9 billion year-over-year. Additionally, Waymo, Google’s self-driving car unit, is now handling 150,000 rides each week, hinting at its potential future value, estimated at $5 trillion.

Along with robust revenue growth, Google has improved its profitability metrics. Alphabet’s operating income increased by 34%, from $79 billion in 2021 to $105 billion currently. Moreover, its operating margin slightly expanded from 30.6% in 2021 to 30.9% over the past twelve months.

Future Prospects for Google Stock

With a 26% increase this year, GOOG stock has outperformed the broader S&P 500 index, which rose by 24%. Yet, recent years have shown inconsistent stock growth, with returns varying significantly: 65% in 2021, -39% in 2022, and 59% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, comprising 30 stocks, has outperformed the S&P 500 every year during this period, showcasing reduced volatility in returns.

As the macroeconomic environment remains uncertain—particularly amid discussions of rate cuts and ongoing antitrust troubles—questions arise whether GOOG will face another tough year similar to 2022, or potentially rebound strongly. Our valuation assessment puts Google’s share price at around $182, which is close to its current price of $178. This estimate is based on projected earnings of $8.05 per share in 2024 at a multiple of 23x. Notably, this P/E ratio is above its three-year average of 18x but still lower than some competitors, like META at 25x and AMZN at 40x forward expected earnings. The lingering risk of the antitrust case poses a concern for Alphabet.

Google’s antitrust woes allege that it monopolizes the market, particularly in search services. The company currently holds a 90% share of the search market, which includes its widely used Chrome browser, essential for user access to Google Search. The browser’s potential market value is estimated at $20 billion. Prosecutors have also argued for Google to share user data with rivals and consider selling Android should the proposed remedies not promote healthy competition.

These antitrust challenges would pose significant hurdles for Alphabet’s long-term business strategy. Despite strong growth prospects in cloud services and continued advertising revenue increases, meaningful stock growth may remain elusive in the near term.

While GOOG appears correctly valued, insights into Google’s peers on essential metrics can be beneficial. Additional valuable comparisons for companies across different industries can be found at Peer Comparisons.

[1] Returns as of 11/21/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.