For the most part, the Magnificent Seven are must-owns, in my view. That’s because these businesses offer everything that I like to see as an investor. The growth prospects of these companies are exceptional with strong balance sheets. Alphabet, or Google (GOOGL), is no exception to this rule. After reviewing Google’s third-quarter earnings report, I am initiating coverage with a Buy rating with a $220 price target.
Pick the best stocks and maximize your portfolio:
- Discover top-rated stocks from highly ranked analysts with Analyst Top Stocks!
- Easily identify outperforming stocks and invest smarter with Top Smart Score Stocks
That’s because the company has tangible growth catalysts and boasts a sizable net cash position. Furthermore, as I’ll discuss in a bit, the factor that puts my bullish sentiment over the top is the arguably cheap valuation.
Google Beat Expectations Again in Q3
On October 28th, Google shared its third-quarter earnings that back up my Buy rating. The company’s revenue climbed 15.1% higher year-over-year to $88.3 billion. For more color, this came in ahead of the $86.4 billion analyst consensus. Strength throughout its Google Services and Google Cloud businesses made this topline growth possible.
In addition, Google’s diluted EPS jumped 36.8% over the year-ago period to $2.12. That was $0.28 better than the analyst consensus of $1.84. The firm’s tight cost management kept the growth of operating expenses under control, which is how diluted EPS growth easily outpaced revenue growth.
More Robust Growth Is Yet to Come for Google
Google looks to have plenty of catalysts to fuel further growth in the years ahead, which further supports my Buy rating. One catalyst that bodes well for the company is its rollout of AI Overview to more than 100 new countries and territories at the end of October. Per CEO Sundar Pichai‘s opening remarks during the Q3 2024 earnings call, this feature will now reach over one billion users monthly. Pichai also noted that engagement thus far has been strong, which is contributing to increased overall search usage and user satisfaction.
Another reason for optimism is that rapid growth at Google Cloud looks poised to continue (revenue grew 35% in Q3 2024). According to Pichai, this is because technology leadership and the AI portfolio are drawing in new customers, winning larger deals, and spurring 30% deeper product adoption with existing customers. Additionally, YouTube Shorts is garnering tens of billions of views each day.
As Google continues to monetize this business by growing viewership and working with advertisers, that should be another boost for the company. Thus, the analyst consensus is that diluted EPS will rise by 11.6% in 2025 to $8.95, followed by another 14.9% boost in diluted EPS to $10.28 in 2026.
Google’s Starting Dividend Is Modest, and the Balance Sheet Is Phenomenal
Google’s dividend has tons of room to grow in the future, which is another reason for my Buy rating. The stock’s 0.5% dividend yield isn’t much compared to the 1.9% average yield of the communication services sector. This is only because Google’s starting payout is highly manageable, with the payout ratio set to clock in below 10% for 2025 at the current quarterly dividend rate.
From my perspective, the company has the flexibility to grow its dividend firmly in the double-digits annually for at least the medium term. That could set up Google to be one of the next truly great dividend growth stocks.
The company’s financial health is another consideration in my Buy rating. This is because, as of September 30th, 2024, Google had a total cash and marketable securities balance of over $93 billion. This puts the company on pace to collect over $4 billion in net interest income for 2024. That explains the AA+ credit rating from S&P Global (SPGI) on a stable outlook. This is just one notch below a prime credit rating, which is a testament to Google’s fortress-like balance sheet.
Google Stock Is a Great Value
Google’s valuation is the icing on the cake for my Buy rating. Shares are currently trading at a forward P/E ratio of just 19.7. That’s significantly lower than the 10-year average P/E ratio of 25. Considering that Google’s annual forward diluted EPS growth potential remains intact in the teens, I believe that a reversion to a mid-20 P/E ratio is realistic.
This produces a fair value of over $220 a share, which would be equivalent to 25%+ capital appreciation. For my money, that prospective capital appreciation is more than enough to justify my bullishness toward the stock.
Is Google a Buy, According to Analysts?
Shifting to Wall Street, analysts have a Strong Buy rating consensus on Google. Among 32 analysts, 25 have assigned Buy ratings, while seven have issued Hold ratings in the past three months. The average 12-month price target of $207.59 would imply an 18.01% upside from the current share price.
See more GOOGL analyst ratings
Summary
Google is a thriving business with several catalysts to sustain its operating momentum. The company’s cash and marketable securities position is sizable and supports one of the best corporate credit ratings on the planet. Google stock is also trading at what looks to be a deal relative to its fundamentals. Therefore, I’m starting coverage with a Buy rating.
