Alphabet stock (NASDAQ: GOOG) has been in the news lately, with the Justice Department proposing the sale of Google Chrome and data sharing with rivals, among other measures to end the monopoly. The judge has set the trial on the proposals for April 2025. Google will have the opportunity to present its own proposals in December. ⁽¹⁾ Google has been known to face antitrust suits and the remedies could be as extreme as the sale of the Android platform. This overhang has also weighed on GOOG’s stock performance lately. Looking at a slightly longer time frame, GOOG stock is up 23% from a level of $144 in early 2022 to $177 today. This can mainly be attributed to:

1. A 32% increase in company revenue from $258 billion in 2021 to $340 billion today; And
2. An 8% decline in total shares outstanding, thanks to the $171 billion the company spent on share buybacks; partially offset by
3. A 14% decline in the company’s price/earnings ratio 6.5x now, against 7.6x in 2021, due to investor concerns about the antitrust case against Google.

What drove Google’s revenue?

Google’s revenue The growth in recent years is due to the cloud business, which is experiencing strong momentum, with the segment’s revenue increasing by a solid 72% between 2021 and 2023. However, its 11% contribution to the company’s total revenue is much smaller than that of the company. 56% for its Google search activities. Its core search business is also doing well, with the company’s AI integration helping it generate higher advertising revenue, a trend expected to continue in the near term.

Looking at the latest quarter, Google’s third-quarter revenue of $88.3 billion reflects a 15% year-over-year gain. Growth was led by its cloud business, with segment revenue increasing 35% to $11.4 billion. Google’s search revenue rose 12% to $49.4 billion, and YouTube ad revenue also rose 12% to $8.9 billion year-over-year. The company’s self-driving car unit – Waymo – now handles 150,000 paid trips every week. Waymo could be the next big thing for Google. Find out how Waymo could be worth $5 trillion.

Not only did the company experience strong revenue growth, profitability also improved. Alphabet’s operating income rose 34% from $79 billion in 2021 to $105 billion today. Operating margin has improved slightly from 30.6% in 2021 to 30.9% in the past twelve months.

Does Google Stock have advantages?

With a gain of 26% this year, GOOG stock has slightly outperformed the broader S&P500 index, up 24%. However, GOOG stock’s rise in recent years has been far from consistent, with annual returns significantly more volatile than the S&P 500. Returns for the stock were 65% in 2021, -39% in 2022 and 59% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And that is true outperformed the S&P 500 every year during the same period. Why is that? As a group, HQ Portfolio shares delivered better returns with less risk compared to the benchmark index; it’s not a rollercoaster ride, as evidenced by the HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment surrounding rate cuts and Google’s antitrust case, could GOOG face a similar situation to 2022 and underperform the S&P in the next twelve months – or will it make a big jump? From a valuation perspective, we think the share price appears fairly priced. We estimate Google’s rating $182 per share, largely in line with the current level of $178. Our forecast is based on 23x expected earnings of $8.05 per share in 2024. This 23x figure is higher than the stock’s average price-to-earnings ratio of 18x over the past three years. GOOG stock trades at multiples lower than some of its peers, with META trading at 25x and AMZN at 40x forward earnings estimates. This is because an important risk remains for Alphabet.

Google is facing antitrust lawsuits, accusing the company of monopolizing the market and general search services. The remedies may include breakup of the company, regulatory scrutiny and restrictions on companies. Now Google has a monopoly on 90% of searches. Prosecutors’ recent argument focused on the company’s search engine – Chrome – a widely used browser with more than 3 billion users. Chrome is very important to Google as it acts as a gateway through which users can access the search engine. The web browser alone could be worth $20 billion. ⁽²⁾ In addition, the plaintiffs argued that Google must share the data it collects from users with competitors. And if the solutions fail to increase competition, Google should consider selling Android.

None of these solutions would bode well for Alphabet’s business in the long run. Therefore, despite strong visibility of growth in the cloud sector, driven by demand for AI and continued growth in advertising revenues, we believe the stock may not see meaningful growth in the near term. Separately, check out Could the startup’s shares double from here?

While GOOG stock looks like it’s well priced, it’s useful to see how Google’s colleagues rate on metrics that matter. Other valuable comparisons for companies from different sectors can be found at Comparisons with peers.

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