For several months, Google's (GOOGL, Financial) stock performance has lagged behind its peers, often referred to as the "Magnificent Seven." Investors find it challenging to assess the risks Google faces, and it seems unlikely that the company's upcoming earnings will alleviate these concerns. The market expects Google's latest financial report to confirm its steady long-term growth trends and potentially unveil positive updates related to artificial intelligence (AI).
Despite the potential for a positive earnings report, concerns about the unquantifiable costs associated with antitrust actions could overshadow it. These regulatory challenges have weighed heavily on Google's stock performance, leading to a lower valuation compared to other tech giants. Additionally, there is intense scrutiny on whether Google's dominant market share in internet search might be threatened by other AI players.
In the past six months, Google's stock has shown little movement, making it one of the worst-performing large-cap stocks during this period. In contrast, the Bloomberg Magnificent Index has surged nearly 26%. Analysts anticipate Google’s revenue to increase by nearly 14% and net profits by more than 18% for the latest quarter, with these metrics expected to maintain double-digit growth in the coming years.
Despite its healthy growth prospects, Google's lower valuation suggests it has fewer hurdles to clear this quarter. According to Jefferies, Google faces a less stringent environment among large-cap stocks and should see its stock price rise over time, driven by fundamental performance, despite regulatory and antitrust challenges.
Currently, Google's forward price-to-earnings ratio is 19, the lowest among its top tech peers and below its 10-year average. In comparison, Microsoft (MSFT), another major AI software company, has a valuation near 31 times earnings.
The valuation discount reflects the unique risks Google faces, particularly concerning antitrust regulations. Following a federal judge's ruling that Google monopolized the search market illegally, antitrust scrutiny has become a significant impediment to its business. Recently, the U.S. Department of Justice proposed that Google might need to divest parts of its business, adding to long-term uncertainties.
Google has made substantial investments in AI, with investors eager to see returns in terms of growth and efficiency. Higher-than-expected expenditure contributed to a sell-off following its last earnings announcement. While AI has boosted demand for Google's cloud services, the company has adopted defensive measures to protect its search market share from AI alternatives.
According to compiled data, nearly 80% of Google's 2023 revenue comes from advertising, with less than 11% derived from its cloud division. Recent reports indicate Meta (META) is developing an AI-powered search engine to reduce reliance on Google.
Despite ongoing challenges, approximately 83% of Wall Street analysts recommend buying Google stock, indicating optimistic consensus, albeit lower than peers like Microsoft, Amazon (AMZN), or Nvidia (NVDA), all of which have bullish ratings close to or above 90%. However, analysts' average target price suggests over 20% upside potential for Google in the next 12 months, making it one of the most promising large-cap stocks.
While regulatory setbacks are unlikely to dissipate soon, Google's high-quality assets and discounted stock with growth exceeding the market provide strong reasons for investors to hold onto it.
