Has Google Run Out Of Room To Grow As The World Wrestles With Covid-19?

by Trefis Team
Alphabet Inc.
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After a 43% rise since the March 23 low of this year, at the current price of around $1,512 per share, we believe Alphabet’s stock (NASDAQ:GOOG) has a slight upside left. Google’s stock has increased from $1,057 to $1,512 off the recent bottom, better than the S&P which also increased by around 44%. The rise in stock price was helped by the Fed’s multi-billion dollar stimulus package announced on March 23rd which lifted market sentiments. The price further rose as Google’s Q1 2020 revenues beat market estimates. Advertising revenue growth slowed but non-advertising revenues were still resilient. Due to lockdown restrictions the usage of all Google properties from Google search to Youtube has gone up, which bodes well for the company. In non-ads segment certain products like Google Classroom and Meet have also seen a surge in usage helping the company’s stock price rise.

The stock currently is 96% above the levels at which it was at the end of 2016 and is just below the pre-Covid (February 2020) high of $1,527. We believe that the company’s stock has only a slight upside left. Our dashboard ‘What Factors Drove 95% Change In Google Stock Between 2016 And Now? has the underlying numbers.

Some of the stock price rise in the 2016-2019 period is justified by the 75% growth in revenues. Google’s revenues increased from $90 billion in 2016 to $162 billion in 2019, mainly driven by growth in Advertising revenues from the Google Search segment. This was offset by a 2% decrease in profitability as net income margin slightly declined from 21.6% in 2016 to 21.2% in 2019.

Stock price increased during this period as margins and revenue grew (and as 2017 margin decline was due to one time tax expense), which led to a flat P/E multiple of 27x in 2016 and 2019. The multiple shot up this year and currently stands at 31x. We believe that the market has been optimistic about the Internet companies in the current environment, which has led to its rise.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. Notably, Google’s stock is up by about 5% since January 31, after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index was flat. Despite the coronavirus pandemic the company saw a 13% growth in Total revenues for Q1 2020. Google Cloud led the revenue growth recorded at 52% y-o-y while the Advertising revenue recorded a 10% growth y-o-y. That said, lower consumer spending and consumption over the coming months could likely lead to lower demand for advertising as companies could focus on core expenses.

Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations vs historic valuations become important in finding value.

Thus, with high revenue growth over the years, better than expected Q1 2020 revenue despite the crisis has helped Google expand its P/E multiple to 31x currently. The company is expected to add close to $36 billion to its revenue in 2020 and 2021. With investors’ focus shifting to 2021, the P/E multiple could rise further, leading to a rise in the stock price. As per Google’s valuation by Trefis, GOOG’s fair price estimate comes to $1,555.

While GOOG stock is likely to see little further upside in the near term, could investing in debt-laden, down-but-not-out companies yield large upside post-Covid? Find out more in our analysis: The Leveraged 5: AAL, CTL, COTY, OXY, HOG.

For greater insight in to the internet space, check out how Twitter and Snap have done over the last few years.


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