Google Faces a Fork in the Road

Google (GOOGL) is an advertising business no matter what anyone else says.

90% of its revenues and nearly of its profits come from advertising.

In fact, it wasn’t until this latest quarter that any other segment turned a profit, when the cloud division pulled in $191 million in operating profits.

Year-to-date, shares are down 26%.

However, signs are emerging advertising spend could be on the rise.

And just maybe, that makes Google attractive at these prices.

Google’s Business

Google is the world’s internet search engine. Period.

With its dominant market position, the company holds immense power to control what results people see. Hence, its hugely profitable advertising business.

Source: Google Investor Relations

That’s recently come under fire from Microsoft, which dropped $10 billion into ChatGPT, which is arguably the next phase in AI interaction.

Google responded by quickly releasing its version that had a lot of problems.

Nonetheless, the company still grows revenue. After a marked slowdown in advertising, customers appear to be spending more as a recession looms large.

Financials

Source: Stock Analysis

After insane growth post-covid, Google saw customers curtail advertising, taking revenue growth from a 19.4% 5-year average to less than 1% in December and 2.6% in the latest quarter.

However, the biggest slowdown came from Q4 of 2021 to Q1 of 2022 where revenues actually declined by an astonishing 9.7%.

To combat the slowdown, Google’s been cutting costs where it can.

Still, margins are down overall as the company works to rightsize itself.

Valuation

Source: Seeking Alpha

Google isn’t exactly cheap at 20.2x forward earnings, especially if its growth is slowing.

Meta (META) was certainly cheap until it doubled after getting obliterated in 2022.

Baidu (BIDU) comes in slightly cheaper on earnings, largely due to the risk premium from investing in China.

On a price-to-cash flow basis, Google isn’t as cheap as its peers, making Meta still more attractive. That could change if and when costs come under control.

Growth

Source: Seeking Alpha

Google does come out on top in terms of revenue growth compared to Meta in the short-term.

While social media stocks like Pinterest (PINS) and Snapchat (SNAP) have much better revenue growth, they are far more expensive relative to their cash generation.

Profitability

Source: Seeking Alpha

The big question is whether Google can bring its margins back in line to justify its current price.

Meta has already done so, reporting results that demonstrate its efforts. Google isn’t quite there yet.

Our Opinion 7/10

Google is a fantastic company. But it’s not the same hands down buy it used to be. 

It faces more competition despite its entrenched position.

We’d be more confident in the stock if and when they provide margin forecasts or cost-cutting goals.

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