To The Moon

$Alphabet(GOOG)$

Google's stock has been experiencing a sell-off recently. While it's still up about 21.5% over the past year, it's down approximately 11.33% in the past month.

From a valuation standpoint, let's analyze Google's historical price-to-earnings (P/E) ratio. Excluding an outlier from 2017, the company's average P/E ratio over the past decade stands at around 26.09.

Breaking down Google's revenue streams, the majority comes from Google Services, which is largely driven by ad revenue. Google Cloud follows, representing a smaller but steadily growing segment. Then there’s the "Other Bets" category, which, while small in comparison, holds significant growth potential.

One of the biggest areas of interest right now is Waymo. Analysts project its valuation could range between $350 billion and $850 billion by 2030. To put that in perspective, Google’s current market cap is just over $2 trillion. If Waymo reaches the midpoint of this estimate, it would be worth around 25% of Google's present value, representing a massive growth opportunity.

Waymo has also been rapidly gaining market share. In November 2023, it held just 1% of the San Francisco market, but by January 2025, that number had surged to 14.3%. Given its limited expansion to other cities so far, there’s still significant room for growth.

Turning to Google's financials, the company has demonstrated strong and consistent revenue growth. Over the past decade, revenue per share has risen from $488 to $2,820, with free cash flow per share and earnings per share following a similar upward trend.

The balance sheet remains exceptionally strong. Google's debt-to-assets ratio is just 0.06, indicating minimal debt relative to its assets. Its current ratio sits at 1.84, reflecting ample liquidity to meet short-term obligations. With total current assets of approximately $163.5 billion, the company is financially well-positioned.

Cash Flow

In fact, due to its strong cash flow, Google announced a dividend last year. In 2024, the company generated about $72.7 billion in free cash flow but paid out only $7.3 billion in dividends—just 10% of its free cash flow—leaving substantial room for dividend growth in the future.

Positive Sentiment

When evaluating a company's competitive advantage, two key metrics stand out:

1. Gross Profit Margin – Google's gross profit ratio has remained high over the years. After a slight decline from 2015 to 2020, it has been trending upward again, with last year’s ratio surpassing its decade-long average.

2. Return on Invested Capital (ROIC) – This metric indicates how effectively a company reinvests its capital. A good benchmark is 10%, and Google has consistently exceeded 20% for the past four years, demonstrating strong profitability in its investments.

Overall, Google's financial strength, growth potential in emerging sectors like Waymo, and competitive advantages make it a compelling company to watch.

This is a positive sign, indicating that from a fundamental perspective, Google still looks strong. But does the AI-driven fear in the market justify a significantly lower valuation multiple for Google?

Currently, Google's forward P/E ratio sits at approximately 18.94. Earnings growth projections range between 16% and 18.5%, which is quite strong. Analysts' forecasts suggest that if earnings grow at these rates, Google's forward P/E ratio could drop to around 12.3 by 2028. For context, this earnings growth rate is higher than that of the S&P 500.

Google Fundamental Strong

For the fourth quarter of 2024, highlighting significant developments across its business segments. Overall Financial Performance: Revenue: The company achieved a 12% year-over-year increase, reaching $96.5 billion for the quarter. Net Income: Earnings for the quarter were $26.54 billion, surpassing analysts' expectations.

Google Cloud: Revenue: Grew by 30% to nearly $12 billion; however, this was below analysts' projections and marked a slowdown compared to previous quarters.

YouTube: Advertising Revenue: Increased by 14%, totaling $10.5 billion for the quarter. AI Investments: Planned Expenditures: Alphabet announced plans to invest approximately $75 billion in 2025 to enhance its AI infrastructure, reflecting the company's commitment to maintaining a competitive edge in the AI landscape.

Valuation

Now, let’s run some valuation models using my stock valuation. Starting with Graham’s valuation formula, which calculates a stock’s intrinsic value based on projected earnings and growth rates, we input Google's estimated EPS of 8.92 and a growth rate of around 15%. This results in an intrinsic value estimate of approximately $163 per share. However, it's worth noting that corporate bond yields are currently higher than their historical averages, which can impact this valuation.

Next, using a discounted cash flow (DCF) analysis, we value Google based on its future free cash flow projections. While earnings are expected to grow at 15%, we apply a slightly lower free cash flow growth rate of 14%, as Google's free cash flow conversion has declined slightly in recent years. After discounting future cash flows, adding cash and cash equivalents, and subtracting total debt, we arrive at a DCF valuation of around $251.90 per share—roughly 25% higher than its current stock price.

We've also examined Google's historical valuation, but how does it compare to similar companies? While there’s no perfect equivalent, we can look at major tech firms, which currently trade at an average P/E ratio of 33.3. Applying this multiple to Google would result in a valuation of around $273 per share.

Summarizing these three valuation methods, we calculate an average intrinsic value of approximately $262.40 per share. With Google’s current price around $172, this suggests an upside of about 20.4%. Interestingly, this aligns closely with the gap we see between Google’s current and historical P/E ratios.

Applying a margin of safety:

• A 20% margin of safety would place the buy price at $172, right around its current trading level.

• A 30% margin of safety suggests an acceptable buy price of around $154.

In both cases, this signals a buying opportunity.

Additionally, Google remains a major player in AI, with plans to invest $75 billion this year in AI development and integration into its core products like Google Search. While competition in AI is increasing, Google’s strong earnings growth, potential upside from its "Other Bets" segment (especially Waymo), and massive cash reserves for reinvestment position it well for long-term growth.

The company continues to achieve high returns on invested capital, and with its rising profitability, there's also potential for increased dividend payouts over time. Despite strong overall performance, Alphabet's stock experienced an 8% decline following the earnings release, primarily due to concerns over increased capital expenditures and slower-than-expected cloud revenue growth.

Let me know in the comments if you're planning to buy or sell Google stock!

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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