Alphabet Stock (NASDAQ:GOOGL): Too Late to Buy after Post-Earnings Surge?
Alphabet (NASDAQ:GOOGL) stock ripped higher after a solid earnings report. Accelerated revenue, improved profit margins, large stock buybacks, and a new dividend that it just announced make it interesting. On top of that, GOOGL stock’s valuation still looks quite reasonable, even after the after-hours rally. In this article, we’ll go over Alphabet’s results and its valuation to show why it’s not necessarily too late to buy the stock after the recent surge. (Disclosure: NOT FINANCIAL ADVICE)
GOOGL Earnings: Did Alphabet Beat Expectations?
Alphabet reported revenues of $80.54 billion for Q1 2024, a 15% increase from the previous year. This exceeded the estimated $78.75 billion.
Alphabet's net income was $23.66 billion, or $1.89 per diluted share. This also beat the expected $18.95 billion in net income, or $1.51 per share.
The strong performance was driven by robust results across Alphabet's major segments, particularly Search, YouTube, and Google Cloud.
Alphabet's Revenue Growth Is Picking Up
Alphabet’s 15% revenue increase was a notable increase from the 13.5% growth seen in Q4 of 2023 and a significant improvement from just 2.6% growth in Q1 of 2023.
Google Cloud was a key growth driver, with its revenue increasing by 28% year-over-year to $9.57 billion. The segment’s operating income for the quarter also skyrocketed to $900 million. In Q1 of last year, operating income was just $191 million.
Below is a breakdown of Alphabet’s income statement.
Profit Margins on the Rise
The surge in Google Cloud's performance reflects Alphabet’s broader shift towards higher profit margins. The company's profit margin landed at 29.4% for the quarter. In the past three quarters, its net income margin hovered around 24-25%, and in Q1 2023, it was 21.6%. Below, you can see its historical profit margins (not including Q1-2024).
Alphabet Replicates Meta Platforms’ Dividend Strategy, Announces Buybacks
Last quarter, Meta Platforms (NASDAQ:META) announced its first-ever dividend, which sent the stock higher. Alphabet did the exact same thing today, sending it 12% higher in after-hours. GOOGL declared a quarterly dividend of $0.20 per share effective June 17, 2024. Additionally, the company has authorized a $70.0 billion stock buyback program, signaling a strong commitment to rewarding shareholders. If all $70 billion gets repurchased at a pre-earnings market cap of 2 trillion, that would imply a 3.5% buyback yield.
As you can see below, GOOGL’s TTM buyback yield is 3.2%.
Is GOOGL Stock Undervalued?
Here’s the interesting part. Even after the stock’s after-hours jump, GOOGL still looks reasonably priced.
Let’s do some math and calculate GOOGL stock’s fair value using our Reverse DCF Calculator.
In the last 12 months, Alphabet has generated $69.111 billion in free cash flow ($16.836B of it being in Q1). Using its share count of 12.527 billion, you get to a TTM free cash flow per share of about $5.52, which we’ll use in our valuation calculation.
Reverse DCF Calculation on GOOGL
Inputs used:
FCF per share of $5.52
Cost of equity (taken from Finbox) of 8.8%
Terminal growth rate of 3%
Post-earnings share price of $174
As you can see below, our Reverse DCF Calculator is saying that at current prices, the market only expects GOOGL to increase its free cash flow per share at a rate of 10.452% for the next 10 years and then 3% per year after that in perpetuity. This makes GOOGL look undervalued because as long as the firm can grow more than those figures, then the stock is undervalued. If you want to learn more about how our calculator works, read this article here.
What About Stock-Based Compensation?
Stock-based compensation is a real expense that gets added back to free cash flow, so if you want to be more conservative, you can include that in the valuation. Its TTM stock-based compensation is $22.44 billion, so that would bring the TTM free cash flow down to $46.67 billion, or $3.725 per share.
If you input that into the calculator, the implied growth rate jumps to 15.59%, which is still a reasonable hurdle for Alphabet to jump over. See below.
There are other things to consider, though. Consider this: Alphabet has $97.66 billion of net cash on its balance sheet. Therefore, just its cash position alone can offset stock-based compensation expense for the next 4 years or so, which would make the valuation that much better. Also, Google’s FCF per share compound annual growth rate over the past three years is 13.65%, which isn’t too far off. Looking ahead, analysts expect mid-teens growth in EPS for the company (see below), which could get revised higher due to the earnings beat.
The Takeaway
Overall, Alphabet had a strong quarter, and its valuation is still reasonable. The company just needs to grow its FCF at a low-to-mid-teens CAGR for the next 10 years for it to be fairly valued, which is definitely possible for them. Nonetheless, we owned shares prior to earnings, so we’d like to see the stock come down a bit before adding more — just for that extra margin of safety.
Final answer: Is it too late to buy? Not necessarily, but we’d prefer a pullback before buying more.
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