Alphabet (Google)’s stock (NASDAQ: GOOG) has lost approximately 22% YTD as compared to the 15% drop in the S&P500 index over the same period. Notably, the benchmark index for the technology sector, the NASDAQ-100 Technology Sector index, has lost 30% YTD. That said, at its current price of $2235, the stock has a potential upside potential of 38% to its fair value of $3095 – Trefis’ estimate for Google’s valuation.
The global technology giant posted mixed results in the first quarter of 2022, with earnings missing the consensus estimates but revenues being in-line. It reported total revenues of $68 billion – up 23% y-o-y, primarily driven by a 22% increase in the Google advertising revenues to $54.7 billion. Notably, the Google advertising includes Google search, YouTube ads, and Google network. The segment witnessed growth on each of the four metrics: – paid clicks (up 16% y-o-y), cost-per-click (up 8%), impressions (up 5%), and cost-per-impression (up 17%). Further, the Google cloud revenues also jumped 44% y-o-y. While the cost of revenues and operating expenses did increase on an absolute basis, the operating margin remained around the same level as the year-ago figure of 30%. On the flip side, the net income decreased 8% y-o-y to $16.4 billion, mainly because of a significant drop in “other income” from $4.85 billion to -$1.16 billion. Markedly, the “other income” includes net gains and losses for marketable and non-marketable equity securities.
The company’s top-line increased 41% y-o-y to $257.6 billion in FY 2021. It was mainly driven by a 43% growth in the Google advertising revenues, followed by a 47% rise in the Google cloud business. All in all, it translated into an 89% jump in the net income to $76 billion. The jump was primarily due to lower expenses as a % of revenues and higher “other income.”
Moving forward, Google’s revenues are forecast to touch $294.9 billion in FY2022. Further, its net income margin is likely to slightly decrease in the year, leading to a net income of $70 billion. This coupled with an annual EPS of $106.68 and a P/E multiple of 29x will lead to the valuation of $3095.
|S&P 500 Return||-2%||-15%||80%|
|Trefis Multi-Strategy Portfolio||0%||-20%||216%|
 Month-to-date and year-to-date as of 6/10/2022
 Cumulative total returns since the end of 2016