Google Stock: More Room To Run (NASDAQ:GOOGL)

Two years ago, I wrote about Google’s (NASDAQ:GOOG) (NASDAQ:GOOGL) stock, Alphabet: A Proven Resilient Stock Selling At A Discount, and forecasted its shares doubling in five years. Two years later, the stock has done just that. Yet, even with already doubling its share price, Google’s stock has more room to run.

Below is a table contrasting the company’s metrics in 2020 when the original article was written to my 5-year estimate at the time, and two years later to show how the stock has doubled in only two years:

Alphabet	Original (as of 3/27/20)	5-Year Estimate	2-Years Later (as of 12/31/21)
Revenue (in millions)	$161,857	$332,283	$257,637
Net Margin (%)	21.22%	19.55%	29.51%
Net Income (in millions)	$34,343	$64,961	$76,033
# Outstanding Shares	698,566,000	680,267,000	675,222,000
Net Income per Share	$49.16	$95.49	$112.20
Price/Earnings (P/E) Ratio	22.58	27	20.4
Stock Price (pre-split)	$1,110.26	$2,578.33	$2,289.80
Stock Price (post-split 20:1)	$55.52	$128.92	$114.49

Click to enlarge

Source of company metrics: Morningstar & Alphabet Investor Relations

Today’s Google

In the company’s latest quarterly report dated July 26th, they reported quarterly revenues increasing 13% from a year earlier, and 17% year-to-date. With the company’s investments in R&D and other growth initiatives, such as AI, Search and Cloud, I believe Google can continue to grow in the high teens. In fact, the company added over 10,000 new hires in the last quarter showing how the company is thinking long term.

These investments are reflected in their expenses rising 18% in the last quarter, which resulted in a decline in net income of 14%. However, the company still generated free cash flow of over $12 billion in the quarter and a total of $65 billion in the last 12 months. As a result, I am not concerned about the recent decline in earnings from the last quarter provided we continue to see reinvestments in their business units to drive growth.

Another positive aspect is Google’s operating margin. With an operating margin of 29%, the company continues to generate margins close to the all-time high reflecting their operational efficiency. I expect this margin to slightly decline from its high over time.

Analysis

Buy Rating: Using the same methodology from my analysis two years ago, I have a Buy rating for Alphabet’s stock with a five-year target price of $240 per share.

In my analysis, I believe the company can achieve a 25% net margin over the next 5 years, which is more moderate than the 29% it currently nets.

With global online advertising estimated to reach $876 billion in 2026, according to Statista, Google has the opportunity to generate $368 billion in advertising revenue alone by continuing to capture 42% of the market. As of the end of 2021, Google generated $209 billion in total advertising revenue, which includes Search and YouTube. For the company to generate advertising revenues of $368 billion, it would have to grow 76% over the next five years, which is a 15% annual growth rate, and is less than the 18% I’m projecting in my analysis.

For the remaining $129 billion in revenue that would come from Google’s non-advertising segments and Google Cloud, these divisions would only have to continue to grow at its current rate of 35% annually to meet the total target revenue of $497 billion in five years.

With the stock currently trading at 20 times earnings, it is trading at a reasonable valuation. I anticipate that the stock’s price-to-earnings ratio (P/E) will expand from 20 to 25 over this time frame.

With the board of directors authorizing an additional $70 billion under its share repurchase program, I am estimating a decrease in outstanding shares by approximately 583 million shares based on current prices, which should boost returns by 10%.

Below is a table contrasting the company’s current metrics and stock price to the 5-year estimate:

Alphabet	Current (as of 8/19/22)	5-Year Estimate
Revenue (in millions)	$257,637	$497,303
Net Margin (%)	29.51%	25%
Net Income (in millions)	$76,033	$124,326
# Outstanding Shares	13,553,000	12,969,000
Net Income per Share	$5.61	$9.59
Price/Earnings (P/E) Ratio	20.4	25
Stock Price	$114.49	$240

Click to enlarge

Source of company metrics: Morningstar & Alphabet Investor Relations

*To better understand how to read the table above, read my previous article Meta: Attractive Valuation.

Just as there are risks that Google would not hit its revenue numbers as a result of inflation, recession and other macro and global economic factors, it’s important to be reminded that the company was able to grow and double its stock price the last two years even as it endured the economic uncertainties related to the pandemic. As a result, I believe Google’s stock has more room to run.