Alphabet Reports Strong Q3 Earnings, But Stock Faces Challenges Ahead

Alphabet stock (NASDAQ: GOOG) experienced a slight increase of over 1% last week, following a solid quarterly earnings report. The company announced revenues of $88.3 billion and earnings of $2.12 per share, both surpassing analyst expectations of $86.3 billion and $1.85, respectively. This growth was largely driven by rising demand for AI solutions. However, much of this positive momentum seems already reflected in the stock’s current price. Below, we delve into the key insights from Alphabet’s results, its stock performance, and its market valuation.

How Did Google Perform in Q3?

In the third quarter, Google’s revenue hit $88.3 billion, marking a 15% year-over-year increase. The robust growth was primarily fuelled by the cloud segment, which reported an impressive 35% rise in sales to $11.4 billion. Additionally, Google’s search revenue rose 12% to $49.4 billion, and YouTube ad revenue also climbed 12% to reach $8.9 billion year-over-year. The company’s self-driving car unit, Waymo, is now providing 150,000 paid rides weekly, positioning it as a potential game-changer for Google.

Besides the revenue growth, Alphabet’s operating margin expanded by 450 basis points year-over-year, reaching 32.3% in Q3. With rising revenue and margin improvement, Alphabet saw a 37% increase in earnings per share, which rose to $2.12, also up 37% year-over-year. Looking ahead, projections indicate the company will generate approximately $96 billion in revenue for Q4, with earnings estimated at around $2.15 per share.

What Are the Implications for GOOG Stock?

Despite Alphabet’s solid performance, analysts believe that the stock price has limited growth potential moving forward. We estimate Google’s valuation at $182 per share, suggesting only a 6% upside from its current trading level of over $170. This estimation is based on a price-to-earnings (P/E) ratio of 23 times the expected earnings of $8.05 per share for 2024. This ratio is notably above the stock’s average P/E ratio of 18 observed over the past three years. Compared to its peers, GOOG trades at a lower multiple; for instance, META is at 26 times and AMZN at 40 times forward earnings. A significant factor contributing to this valuation is the ongoing antitrust challenges Alphabet faces, with allegations of monopolizing search services that could lead to regulatory scrutiny or structural changes. Although a company breakup seems unlikely currently, such issues could hinder Alphabet’s long-term business prospects.

GOOG stock has gained over 20% this year, aligning closely with the overall S&P 500 index. However, its performance has been markedly inconsistent in recent years, with annual returns fluctuating significantly: +65% in 2021, -39% in 2022, and +59% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio has demonstrated much lower volatility, outperforming the S&P 500 each year during the same period. This portfolio consists of 30 carefully selected stocks that typically offer more stable returns compared to the broader index.

While the outlook for GOOG stock is cautious, it’s important to explore how Google’s Peers compare on critical financial metrics. More detailed comparisons of companies across various sectors can be found at Peer Comparisons.

[1] Returns as of 11/4/2024
[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.