What Factors Drove A 2x Rise In Alphabet Stock?
With a 7% decline year-to-date (YTD), Google’s stock (NASDAQ:GOOG) has lagged behind the S&P 500, which has risen by 2%. This underperformance is partly attributed to heightened regulatory scrutiny and rising investor concerns about the potential disruption of Google’s search business by AI.
Despite this, GOOG stock has doubled since early 2023, supported by three major factors:
- a 47% increase in the Price-to-Sales (P/S) ratio: The P/S multiple rose from 4.1x to 6.1x during the period.
- a 27% jump in revenues: Revenues grew from $283 billion in 2022 to $360 billion today.
- a 7% reduction in total shares outstanding: This was due to approximately $200 billion in share buybacks since 2022.
We’ll examine these drivers in more detail. While GOOG stock has delivered strong returns, those seeking growth with less volatility than individual stocks might explore the High Quality portfolio, which has outpaced the S&P 500 with returns exceeding 91% since inception. Also see – QUBT Stock Is Up 80% In A Month. What’s Happening With Quantum Computing?
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What’s Behind The Revenue Growth?
Google’s revenue growth in recent years has been fueled largely by its cloud segment, which saw a 64% rise in sales from 2022 to 2024. Its core search business also remains robust, underpinned by higher ad revenues—a trend that appears sustainable. Over the same period, search ad revenues rose 22%, while YouTube ad revenues increased by 24%.
Artificial intelligence has become a key driver across Google’s platforms. AI-enabled features like AI Overviews and Circle to Search have improved Search engagement, while Google Cloud’s AI suite has experienced rising demand. These developments underscore Google’s ability to diversify revenue sources while maintaining its leadership in advertising. Waymo, its autonomous driving unit, now delivers more than 250,000 paid rides weekly across Phoenix, San Francisco, Los Angeles, and Austin. See – While Tesla Talks, Waymo Drives.
What’s Driving The Valuation Higher For GOOG Stock?
Since 2022, Google’s operating margin has expanded by 600 basis points, improving from 26.5% to 32.7%. This margin expansion has been supported by the growing profitability of Google Cloud, strength in the advertising business enhanced by AI, and disciplined cost management throughout the company.
These gains in profitability, combined with strong sales growth and increasing demand for cloud services amid the AI surge, have improved investor sentiment. As a result, the company’s P/S ratio rose 47%, moving from 4.1x to 6.1x.
But What Next? Is GOOG Stock A Buy At $180?
Currently trading around $180, GOOG stock’s P/S multiple of 6.1x is close to its five-year average of 6.2x. Refer to Google’s Valuation Ratios for additional context.
There’s reason to believe the valuation could rise further. Google’s strategic AI initiatives are expected to significantly expand its business. Google Cloud is positioned to gain from rising enterprise AI adoption, boosting demand for both infrastructure and platform services. Simultaneously, AI will optimize Search and advertising by enhancing relevance and targeting, leading to higher user engagement and improved ROI for advertisers. AI features are also expected to bolster YouTube engagement and drive growth in premium subscriptions.
But There Are Risks
Despite the strong outlook, there are notable risks. In the inflation-led 2022 downturn, GOOG stock dropped 44.6%, declining from a high of $150.71 on November 18, 2021, to $83.49 on November 3, 2022. In contrast, the S&P 500 saw a smaller decline of 25.4%. Although GOOG rebounded to its pre-crisis peak by January 25, 2024, a similar sell-off occurred earlier this year amid trade war concerns, where GOOG fell nearly 30%, compared to a 19% drawdown for the S&P 500. More on this is available in our Buy or Sell Google Stock dashboard.
Apart from macro and geopolitical risks, Google faces internal challenges, especially regarding its significant capital expenditures. Since 2022, the company has invested $134 billion in CapEx. A pressing question remains: what if these large-scale investments don’t yield the expected returns? Regulatory headwinds also loom, with the Department of Justice pushing for a breakup to curb alleged monopolistic control in search. See – Google’s $1 Trillion Lawsuit.
Of course, regulatory challenges are just one component of the comprehensive risk assessment framework applied in constructing the Trefis High Quality (HQ) Portfolio. This portfolio includes 30 stocks and has consistently beaten the S&P 500 over the past four years. The reason? HQ Portfolio holdings have delivered stronger returns with lower risk than the broader index, providing a smoother ride, as shown in the HQ Portfolio performance metrics.
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