Alphabet, the parent company of Google, exceeded earnings expectations for the second fiscal quarter. This was mainly due to the strong performance in the digital advertising business and the Cloud segment. For the first time ever, Google’s Cloud revenue surpassed $10 billion in a single quarter. Despite these achievements, the market did not react positively, with shares falling 2% in after-hours trading.
Looking ahead, there are three key reasons why Google could see a higher valuation in the future: strong free cash flow, momentum in Cloud and Artificial Intelligence, and stock buybacks. The recent dip in stock price could present an opportunity for investors to engage with the company.
In the previous quarter, Google showed solid growth in advertising revenue and a significant increase in its Cloud business. The company’s stock buyback program further added to its attractiveness for investors. Google’s performance in the second quarter, with adjusted earnings of $1.89 per share on revenues of $84.7 billion, exceeded market expectations.
Google’s total advertising revenue reached $64.6 billion in the second quarter, driven by growth in Google Search and YouTube ads. The Cloud segment was a standout performer, generating over $10 billion in revenue and showing a 29% year-over-year growth rate. With a strong free cash flow margin of 15.9%, Google has the financial flexibility to invest in new opportunities, such as acquisitions in Cloud, cybersecurity, and AI.
Despite these positive indicators, Google’s stock is undervalued compared to its earnings and profitability. With a price-to-earnings ratio of 21.3X, Google is considered one of the most profitable and cheapest companies in the tech industry. If Google were to reach the industry average P/E ratio of 26.9X, its stock could have a 26% upside potential to a fair value of $230.
However, there are risks associated with Google’s heavy reliance on digital advertising, which accounts for 76% of its total revenue mix. A slowdown in the digital marketing sector could pose challenges for Google. Nevertheless, the company’s strong position in Cloud and its potential for growth in other sectors make it an attractive investment opportunity.
In conclusion, despite the recent stock price dip, Google’s solid performance in the second quarter and its growth prospects in Cloud and AI indicate that the company is undervalued. With a fair value potential of $230 and strong financial fundamentals, Google remains a promising investment option for tech investors.
