This quarter’s earnings season has kicked off. Investors are now centering their attention on the technology sector, as the biggest names report how the first half of 2024 has been going for them, giving markets – and investors – a feel for what could come throughout the year's second half. This week, one of the sector’s giants, Alphabet Inc. (NASDAQ: GOOGL), came in to give a potential buying opportunity.
After reporting its second-quarter 2024 earnings, Alphabet (Google) stock is down by over 5%. However, this selloff might not have anything to do with the actual results or the current state of the company’s operations. Instead, some could blame a broader market decline. The S&P 500 is also down by nearly 2% on the day, dragging stocks like Google with it, as technology names are typically more volatile than the market.
Now that the stock has retreated from a new 52-week high, investors should investigate the results that brought about the discount rather than blindly buy into the downward momentum. A few metrics should be considered for this decision, and they can all be found by studying not only Google’s results but also the business cycle.
Google's Earnings Highlight Its Position in the Current Business Cycle
Looking at the main drivers in Google’s business, investors can see how the business cycle might be about to bottom. Revenues for the quarter reached $84.7 billion, which, compared to $74.6 billion a year prior, represents a 14% increase over the past 12 months.
More than that, the company’s operating margins improved, as $27.4 billion in operating income showed investors an operating margin of 32% for the quarter compared to 29% a year ago. Of course, all of this growth and improvement trickled down to what investors – and markets – care about the most: earnings per share (EPS).
Net income of $23.6 billion would translate into $1.89 EPS for the quarter, a significant jump of over 31% for the year. Given this, investors need to understand the story behind the numbers to reasonably project expectations moving forward.
Google’s revenue growth mainly came from Google Advertising. Reaching $64.6 billion made this segment the biggest and fastest growing for the company. This is where investors can start to ask questions about the state of the business cycle.
Advertising revenue is made from businesses, both big and small, buying advertising space on Google to gain exposure for their businesses. However, to make this happen, businesses need to have enough marketing budget to pay Google to sponsor the ads.
Most investors drop the ball here; they cannot see that bigger advertising revenue in Google also means a better state of affairs for businesses, as marketing is typically the last thing to worry about unless business is booming.
Considering that the ISM services PMI index is now below the 50% mark, and anything below 50% meaning contraction, it looks like the bottom – and rebound – might be in soon, or at least that’s what Google’s advertising revenue numbers suggest.
Strong Financials Reinforce a Positive Outlook for Google Stock
With the company’s rise in cash flows, management could only do the right thing this quarter. Among many great decisions, it took as many as 300 million shares off the market by allocating up to $15.6 billion of capital to the company’s repurchase program.
It is no coincidence that just a day after the quarterly earnings announcement, analysts at Mizuho Financial upgraded Google stock’s price target. This time, these analysts see up to $210 a share potential for Google stock, daring it to rally by as much as 20.6% from the discounted levels it trades at today.
More than that, there are other metrics investors can follow to decrypt how the market feels about Google stock compared to its peers. Through valuation multiples like price-to-book (P/B) ratios, investors can determine whether the stock is a positive or negative outlier from the rest of the pack.
By trading at a 7.9x multiple, Google stock commands a premium of 16.2% from the rest of the computer sector. Now, investors know better why the market might be willing to overpay to access Google’s book value today.
