Shares of Google (NASDAQ: GOOG) have recently seen a post-earnings fall that lasted from the beginning of February through the end of the month due to negative advertising revenue growth in Q4’22. Google may soon announce a fresh stock purchase, as the current $70 billion buyback will conclude in June (at the present pace of $5 billion per month). I believe that a fresh, enlarged stock repurchase might be a powerful trigger for Google’s lagging stock price. With a P/E ratio of 15.6 X, I feel that buybacks make a lot of sense for Google, and if the company announces a fresh authorization, the stock might enter a new uptrend. While the advertising downturn is not yet ended, Google’s Cloud business might restrict the negative potential of the stock in fiscal year 2023!
Why stock repurchases are the best strategy.
A prospective stock buyback might be one of the largest and strong triggers that could drive an upward revaluation of Google’s shares. Google announced a $70B stock repurchase in April of last year, and I believe that the technology corporation, with its shown free cash flow prowess in the fourth quarter, could afford a significant increase in its stock buyback. In Q4’22, Google recorded $16.0 billion in free cash flow and repurchased $15.4 billion worth of its own shares. In FY 2022, Google repurchased $59.3B worth of shares, including the retirement of 61M Class A shares (worth $6.7B) and 469M Class C shares… on which Google spent the majority of its buyback funds, $52.6B. Based on the current purchase rate of $5 billion each month, the program might conclude in May or June.
As of December 31, 2023, Google had $28.1 billion remaining in its stock buyback authorization (including Class A and Class C stock) and has been an aggressive buyer of shares in previous years. I anticipate that Google will announce a fresh stock buyback before the present program expires, which I anticipate will occur within the next three months.
I feel that Google’s stock buybacks make a lot of sense at the present price, and now is an excellent time for the tech company to double down on buybacks… since the stock is inexpensive. Google has the ability to repurchase its own shares at a P/E ratio (FY 2024) of 15.6 X, which is 24% lower than its 1-year average P/E ratio. In addition, Google’s shares are now trading at their 1-year low, so the company would be wise to be aggressive with its stock buybacks.
In FY 2023, Google may have a second catalyst.
Google’s operational and financial performance relies heavily on its advertising business since it derives the majority of its revenue from digital advertising. Google’s all-important advertising division had negative top-line growth in the fourth quarter, as marketers continued to reduce ad spending. Among other factors, inflation had caused marketers to spend less on digital ad campaigns, resulting in one of the worst financial reports I can recall seeing from Google.
Google Search experienced a negative top-line quarter in Q4’22, with revenues falling 1.6% year-over-year to $42.6B, and the advertising market continued to decelerate. Despite Google Cloud’s double-digit revenue increase in the fourth quarter, Google’s overall ad sales declined by 3.6% year-over-year to $59.0B, resulting in a relatively low top-line growth rate of only 1%. The technology business may have had negative growth on a consolidated basis if not for Google Cloud.
Google and Meta Platforms (META) are expected to benefit the most from a rebound in the ad industry, given their unparalleled reach in digital marketing and their ability to swiftly absorb a return of advertising revenue if marketers regain confidence in the US economy.
The Cloud business will continue to stabilize Google’s financial performance in the interim. The Cloud business contributed for 9.6% of Google’s sales in Q4’22, and I predict Google Cloud may become a $55B to $60B business by FY 2025 and account for 15% of the company’s overall revenue. Accelerating adoption by business clients, backed by aggressive deployment of AI technology, and market share increase might both contribute to development in this industry.
Google’s market share in the Cloud infrastructure market increased from 7% in Q4’20 to 10% in Q4’22, a 3 percentage point (PP) increase in less than two years. Google Cloud is also the fastest-growing company inside Google, with a 32% year-over-year growth rate in Q4’22.
Dangers with Google.
The downturn in the advertising business, which has weighed on the company’s valuation and top-line growth, is currently Google’s largest challenge. If evidence surfaces in the future quarters that advertisers continue to be reluctant to spend money on online advertisements, Google’s core business may continue to suffer, and the company’s stock price may see yet another decline.
Last thoughts.
In order for the company’s shares to revalue higher, Google needs to do more and build catalysts. I continue to believe that Google’s massive free cash flow capabilities might result in a significant new stock repurchase authorization, which could serve as a catalyst for the company’s price in the coming months. In order for investors to anticipate a reacceleration of Google’s top-line growth, a rebound in Google’s advertising business would likely be necessary. Google Cloud is stabilizing Google’s business, and if the ad market continues sluggish, it might keep the company from seeing negative revenue growth on a consolidated basis in Q1’23. Google’s stock is still inexpensive and trading at one-year lows, so an aggressive repurchase would make a tonne of sense right now.
