Alphabet (Google)’s stock (NASDAQ: GOOG) has lost approximately 18% YTD as compared to the 13% drop in the S&P500 index over the same period. That said, at its current price of $118, the stock is trading 20% below its fair value of $148 – Trefis’ estimate for Google’s valuation. Notably, the company completed a 20-for-one stock split in the form of a one-time special stock dividend in mid-July, making its stock a lot more affordable to the retail investor.
The global technology giant posted weak results in the second quarter of 2022, with earnings and revenues missing the street estimates. It reported total revenues of $69.68 billion – up 13% y-o-y, driven by a 12% increase in Google advertising (includes Google search, YouTube ads, and Google network) and a 36% jump in the Google cloud segments. Notably, three out of four key metrics of the advertising segment posted growth on a year-on-year basis – paid clicks (up 12% y-o-y), impressions (up 6%), and cost-per-impression (up 2%). On the flip side, the operating margin decreased three percentage points to 28%, due to higher cost of revenues and an increase in operating expenses. Further, other income (expense), which reflects gains and losses on marketable and non-marketable equity securities, decreased from $2.6 billion to -$439 million. Overall, it led to a 14% drop in the net income to $16 billion.
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 Google advertising revenues, followed by a 47% rise in the Google cloud business. However, the growth rate slowed down in the first two quarters of 2022. Markedly, the six months revenues improved 17% y-o-y to $137.7 billion. Altogether, the net income for the first six months of 2022 declined 11% y-o-y to $32.4 billion due to an unfavorable drop in other income (expense).
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Moving forward, Google’s revenues are forecast to touch $287.7 billion in FY2022. Further, its net income margin is likely to decrease from 29.5% to around 24% in the year, leading to a net income of $69.3 billion. This coupled with an annual EPS of $5.28 and a P/E multiple of 28x will lead to the valuation of $148.
|S&P 500 Return||0%||-13%||85%|
|Trefis Multi-Strategy Portfolio||5%||-9%||259%|
 Month-to-date and year-to-date as of 8/9/2022
 Cumulative total returns since the end of 2016