🔍 Google: AI Tailwinds

TLDR;

• Advertising: $65.9 billion (+10%, down from +11% in Q2).
  • Search: $49.4 billion (+12%).
  • YouTube ads: $8.9 billion (+12%).
  • Network: $7.5 billion (-2%).
• Subscriptions, platforms, and devices: $10.7 billion (+28%).
• Cloud: $11.4 billion (+35%, accelerating from +29% in Q2).
• Small Buyback Increase.
• Cheap Valuation.

Google’s Q3 FY24 Results:

• Revenue grew +15% Y/Y to $88.3 billion ($2.0 billion beat).
• Gross margin was 59% (+2pp Y/Y).
• Earnings per share (EPS) was $2.12 ($0.27 beat).
• Operating cash flow was $30.7 billion (35% margin, -5pp Y/Y).
• Free cash flow was $17.6 billion (20% margin, -10pp Y/Y).
• Long-term debt: $13 billion.

Google Services Segment:

1. Q3 revenue: $76.5 billion (87% of Alphabet’s total)
2. Year-over-year growth: 12.5%
3. Operating margin: 40.3% (up from 35.2% YoY)

Advertising Revenue:

1. Total: $65.9 billion (75% of total revenue)
2. Year-over-year growth: 10.4%
3. Breakdown:
   • Search: +12.2%
   • YouTube Ads: +12.2%
   • Google Network: declined 2% (9th consecutive quarter)

Competitive Landscape:

1. Amazon’s ad revenue: $14.3 billion (+19% YoY)
2. Meta’s ad revenue: $39.9 billion (+19% YoY)
3. Intensifying competition for Google in digital ad spend.

Google Search Segment:

1. Q3 2024 revenue: $49.4 billion
2. Year-over-year growth: 12.2%
3. Market share: 89.3% (down from 91.6% in Oct 2023)

Competitive Landscape:

1. Microsoft Bing:
   • Market share: 4.15% (up from 3.1% in Oct 2023)
   • Modest gains, but still lagging behind Google
2. Google vs. Bing:
   • Google outperforms Bing in search revenue growth over the past 6 quarters.
   • Google Search remains dominant despite generative AI concerns.

Positives:

• A strong first-mover advantage with Waymo.
• Cloud & enterprise products 
• Consumer data – Android, maps, Gmail, Office docs 
• Cash position and buybacks
• It has a near monopoly in Search
• Market leadership in media with YouTube.

Negatives:

• DoJ lawsuit & many other govs (e.g. EU) targeting the company. 
• Declining search stats , direct impact on ad-revenues.
• In consumer products area – no new ‘wow’ product since 10 years.
• Lower FCF Due to higher Capex.

2029 Valuation

Assumptions :

• LTM Revenue: $328.284B
• 5Y Revenue CAGR: 9%
• 2029 Profit Margin: 28%
• 2029 PE Ratio: 22
• Shares outstanding: 12.581B
• Shares reduction: 2.5%/year

Valuation :

• Q2 2029 GOOGLE SHARE PRICE = 328.284 * (1.09)^5 * 0.28 * 22 / [12.581 * (0.975)^5] = $281
• Using discount rate for Google as 9%.

• CURRENT SHARE PRICE: $172
• DISCOUNT RATE: 6%
• FAIR VALUE: $281 / (1.06)^5 = $210
• POTENTIAL UPSIDE: (($210 – $172) / $172) × 100% = 22%
• EXPECTED RETURNS: ((($281 / $172)^(1/5)) – 1) × 100% ≈ 6.5%/year
• DIVIDEND YIELD: 0.53%
• MY RATING: Wait for consolidation 🟡 (~$150)|, for conservative buyers : Accumulate on red days.