Alphabet's (GOOG 1.09%) (GOOGL 1.15%) stock surged 10% to its all-time high on April 26 after the tech giant posted its first quarter earnings report. Its revenue rose 15% year over year to $80.54 billion, exceeding analysts' estimates by $1.84 billion, while its earnings-per-share (EPS) rose 62% to $1.89 and cleared the consensus forecast by $0.39.
Alphabet also approved a new $70 billion buyback plan, which is equivalent to about 3% of its market capitalization, and initiated its first-ever quarterly dividend of $0.20 per share, which translates to a forward yield of 0.5%. Those announcements dazzled the bulls, but will Alphabet's stock rally to fresh highs over the next 12 months?
Image source: Google.
Its core businesses are accelerating again
During the first quarter, Alphabet generated 77% of its revenue from Google's advertising business, which includes its search engine, advertising network, and YouTube. Google's subscriptions, platforms, and devices segment (including YouTube Premium, YouTube Music, Google One, Google Play, and its hardware devices) accounted for 11% of its revenue, while 12% came from Google Cloud. Here's how those three core businesses fared over the past year.
|
Metric |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Q4 2023 |
Q1 2024 |
|---|---|---|---|---|---|
|
Google Advertising Revenue Growth (YOY) |
0% |
3% |
9% |
11% |
13% |
|
Google Subscriptions, Platforms, and Devices Revenue Growth (YOY) |
9% |
24% |
21% |
23% |
18% |
|
Google Cloud Revenue Growth (YOY) |
28% |
28% |
22% |
26% |
28% |
|
Total Revenue Growth (YOY) |
3% |
7% |
11% |
13% |
15% |
Data source: Alphabet. YOY = Year-over-year.
Google's advertising business suffered a slowdown in 2022 as the macro headwinds drove many companies to rein in their marketing spending. However, the segment's growth accelerated again over the past year as the growth of YouTube and its search-based ads offset its declining advertising network revenues. The pending ban on TikTok in the U.S., which might take effect next January, could also drive even more users to YouTube.
Google's subscriptions, platforms, and devices segment continued to grow as it locked more paid subscribers into its services. In the first quarter, YouTube Premium and Music's subscribers hit 100 million global subscribers, YouTube TV reached 8 million subscribers, and Google One exceeded 100 million subscribers. That expansion should gradually reduce its long-term dependence on macro-sensitive ads.
Google Cloud's growth accelerated again as it upgraded its AI tools and rolled out over 1,000 new products and features over the past eight months. That acceleration countered the bearish notion that it was falling behind its two larger competitors, Amazon Web Services (AWS) and Microsoft Azure, in the cloud and AI race.
Analysts expect Alphabet's revenue to rise 13% in 2024 and 11% in 2025, compared to its 9% growth in 2023 and 10% growth in 2022. Those stable estimates suggest its advertising, subscription, and cloud ecosystems will continue to expand.
Its margins are expanding again
Alphabet's operating margin rose by a percentage point to 27% in 2023 as it aggressively cut costs to counter its slowing ad sales. But in the first quarter of 2024, that figure expanded seven percentage points year over year to 32% as its advertising business recovered, it expanded its higher-margin subscriptions, and Google Cloud's operating margin more than tripled.
As a result, Alphabet's trailing 12 month free cash flow (FCF) increased 11% year over year to $69.1 billion -- and it plans to return a lot of that cash to its investors through its new buyback plan and dividend payments. Analysts expect Alphabet's operating margin to expand year over year to 31% in 2024 and grow by less than a percentage point in 2025. They expect its EPS to rise 30% this year and increase 11% in 2025.
Based on those estimates and its current price of $172, Alphabet's stock still seems reasonably valued at 23 times this year's earnings. Meta Platforms, which is growing at comparable rate, also trades at 23 times forward earnings.
Where will Alphabet's stock be in a year?
Alphabet faces stiff competition in the advertising, cloud, and AI markets. But its strong first quarter report suggests it can continue growing, while its shareholder-friendly buybacks and dividends should limit its downside potential.
Assuming Alphabet stays on track to match analysts' earnings estimates and still trades at 23 times forward earnings next April, its stock could rise to about $193 over the next 12 months. That would only represent a 12% gain from its current price, but it could climb even higher over the following years as its business expands and evolves.
