Google Exceeds $2 Trillion Yet Remains Affordable

In the midst of an increasingly digital world, Google (NASDAQ:GOOGL) continues to prove its dominance and adaptability. Following their Q1 2024 report, it is clear that the tech giant has surpassed analyst consensus expectations in terms of revenue growth, profit growth, and capital distribution. Following the release of these results, the company's stock surged by as much as 15% in after-market trading.

Google's first quarter saw a significant increase in both revenue and operating income, up 15% YoY and 46% YoY, respectively. The significant acceleration in commercial momentum on platforms like Google and YouTube is largely responsible for this. Given these impressive figures, I am confident to reiterate my "buy rating" for Google stocks; furthermore, against a backdrop of better-than-expected earnings momentum, I am raising my base case target price to $201 per share.

Over the course of this year alone, Google shares have increased by approximately 23%, compared with a gain of about just 7% for the S&P500 (SP500). Clearly, then, Google stocks are outperforming those within broader U.S. markets.

The world-leading search engine operator generated $80.5 billion in sales from January through March, marking an impressive increase from last year’s figures during the same period. Increases in ad revenues from YouTube (up 21%) and Search (up 15%) particularly drove the growth. Revenues also rose significantly due to cloud services, which were up 27%. In total, Q1 revenues exceeded estimates by around $1 billion, according to data collected by Refinitiv.

This trend continued into profitability: operating margin expanded nearly seven percentage points, reaching 32%, while operating income soared to $25.5 billion, reflecting almost a third increase compared with Q1 last year.

After accounting for interest and tax expenses ($301 million), net income reached over $23 billion, translating to $1.91 per share—a significant increase from the previous year’s $1.18 and also surpassing Refinitiv estimates of $1.64.

Google's cloud business has also shown promising signs of growth: Q1 revenue rose to reach almost $10 billion, with operating earnings for the segment edging towards the billion-dollar mark.

Equally encouraging is Google's commitment to distributing capital back to investors, supported by substantial free cash flow and a centi-billion cash position on its balance sheet. Notably, in Q1 alone, Google repurchased about 15% more worth of common shares than they did in the same period last year (up nearly 8%). In line with this trend, management approved an additional buyback program worth around $70 billion alongside their first-quarter dividend announcement, paying out nearly two and a half billion dollars at twenty cents per share.

Following these impressive results, which exceeded expectations, I am updating my valuation assumptions. Based on analyst consensus estimates collected by Refinitiv (+/- 10%), I now anticipate Google's earnings per share for FY 2024 to fall within approximately a range of between seven and eight dollars (non-GAAP), reaching as high as close to ten dollars come FY 2026.

With these updates taken into account, I assess that the fair value of Google stock stands at around $201—significantly higher than both my previous estimate ($169) and current market trading prices (~$172).

Given all this information, it is evident that investing in stocks from a dominant player like Google, which not only meets but exceeds expectations across key performance metrics and shows clear potential for further upside throughout 2024, is prudent.