Question: Why would you pay 37 times earnings for Philip Morris stock when you can buy Google stock for a much cheaper valuation of 19 times earnings? You wouldn’t, especially when you consider three simple facts:
- Growth: Google’s revenue growth rate is accelerating at over 13% – better than Philip Morris’s revenue growth of 7%. Over the last three years, Google’s average growth rate stands at a good 10%, slightly superior to Philip Morris’s growth figure of less than 7%.
- Margins: Google’s profitability is evident in its three-year average operating cash flow (OCF) margins of 36%, ensuring a greater portion of revenue gets converted into cash. This is superior to Philip Morris’s 30% average OCF margins.
- Financial Stability: Google’s balance sheet is more robust, with debt making up only 1% of equity, considerably less than Philip Morris’s 18%. Furthermore, Google maintains a much stronger cash position (20% of total assets), compared to the latter’s 7%.
But Then, Is GOOG Stock A Safe Bet?
Now, Google isn’t exactly a safe haven, as its past behavior during market shocks demonstrates. For instance, GOOG stock fell 45% during the 2022 inflation shock, a much steeper drop than the S&P 500’s 25% peak-to-trough decline. Although GOOG rebounded to its pre-crisis peak by January 25, 2024, a similar sell-off occurred earlier this year amid trade war concerns, where GOOG fell nearly 30%, compared to a 19% drawdown for the S&P 500. More on this is available in our Buy or Sell Google Stock dashboard. On a separate note, see Archer Aviation: What’s Happening With ACHR Stock?
Google’s AI Growth Engine
Google’s strategic AI initiatives are poised to significantly expand its business. Google Cloud stands to benefit immensely from the increasing adoption of AI by enterprises, which will naturally drive demand for both its infrastructure and platform services. At the same time, AI will optimize Search and advertising by enhancing relevance and targeting, ultimately leading to greater user engagement and improved return on investment (ROI) for advertisers. Furthermore, AI features are expected to boost YouTube engagement and fuel growth in its premium subscriptions.
What Could Go Wrong?
Google’s earnings might disappoint, and sales growth could slow from 13% last year to around 8-10% in the near term as companies focus on saving cash if the geopolitical tensions worsen and the economic growth slows.
Apart from macro and geopolitical risks, Google faces internal challenges, especially regarding its significant capital expenditures. Since 2022, the company’s capital expenditures bill has topped $134 billion. A pressing question remains: What if these large-scale investments don’t yield the expected returns? Regulatory headwinds also loom, with the Department of Justice pushing for a breakup to curb alleged monopolistic control in search. See – Google’s $1 Trillion Lawsuit.
Then there’s always the unexpected and unimagined. Definitely do not touch this stock if you can’t withstand a 40% downside from current levels. The worst thing you could do is sell at that point. Instead, talk to an advisor who has seen four bear markets in the last 30 years and ask about the Trefis HQ strategy and other clever ways to take advantage of a market downturn. A key insight: much money is made in this market if you don’t lose your composure. All in all, if you’re a long-term investor looking to invest and forget for the next 3-5 years, GOOG stock right now could still be an interesting entry point.
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