Google recently reported robust earnings after Thursday's trading session, yet its stock performance lagged behind the broader market the following day. Despite favorable valuation metrics like P/E ratio when compared to its financial data, Google's stock raises the question: is it truly a good buying opportunity, or is there a hidden reason for its perceived undervaluation? This article delves into Google's financial health, business segments, and potential risks to assess its investment potential.
Portfolio Update
My publicly shared stock portfolio has rebounded to over $150,000, driven by the strong performance of Tesla and NVIDIA. No new individual stock or options trades have been executed since the last update.
Google's Valuation and Financial Performance
Undervaluation Compared to Peers
Google's forward P/E ratio currently stands at 18, lower than its 5-year median of 21.5 and 10-year median of 22.5. In comparison, the average forward P/E ratio of the "Magnificent Seven" has decreased from 29 to 25 after recent market sell-offs, making Google appear significantly undervalued relative to its peers. Despite investor skepticism, Google's financial results are undeniably strong.
Key Financial Highlights
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Q1 2025 Revenue: \$90.2 billion, up 12% year-over-year, exceeding market expectations.
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Operating Profit Growth: Increased by 20% year-over-year.
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Operating Cash Flow: Surged 25% year-over-year.
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EPS Growth: Nearly 50% year-over-year; over 20% excluding non-recurring SpaceX investment gains.
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Capital Allocation: Announced a \$70 billion stock buyback program and reaffirmed a \$75 billion capital expenditure plan focused on AI and cloud infrastructure.
Google's financial strength is evident in its robust cash flow, with \$75 billion in free cash flow over the past 12 months and nearly \$100 billion in cash reserves. Overall, Google has a strong balance sheet and substantial cash.
Google's Business Segments: Opportunities and Challenges
Search Advertising
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Revenue Contribution: Comprises 56% of Google's total revenue, making it the largest contributor and a source of concern for investors.
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Threat from AI: Large language models (LLMs) like ChatGPT are capable of extracting key information and providing direct answers, potentially reducing reliance on traditional search and advertising revenue.
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Analyst Predictions: Gartner forecasts a potential 25% decline in traditional search engine traffic by 2026 due to AI chatbots and virtual assistants.
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Recent Performance: Google's search advertising revenue has continued to grow despite the rise of LLMs, albeit with slightly decelerated growth in recent quarters. Whether this slowdown is cyclical or due to AI impact requires further monitoring.
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Google's Response: Google has introduced "AI Overviews," which incorporate AI-generated summaries and optimized webpage links within search results. Initial results indicate that AI Overviews generate comparable advertising revenue to traditional search results pages.
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Outlook: While LLMs pose a challenge, the market might be overestimating the speed and magnitude of their impact on Google Search.
YouTube
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Dominance in Streaming: YouTube commands a significant share of the streaming landscape, accounting for 12% of total U.S. television viewing time in March 2025, surpassing Netflix's 8.1%.
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Advertising Challenges: YouTube's advertising revenue growth has slowed, increasing by 10% year-over-year in Q1 2025.
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Subscription Growth: YouTube's subscription revenue increased by 19% year-over-year, representing a positive trend.
Google Cloud
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Rapid Growth: Google Cloud achieved record quarterly revenue, exceeding \$10 billion for four consecutive quarters.
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Growth Rate: Despite decelerating, growth remains high at approximately 30%.
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Supply Constraints: Management has indicated that cloud revenue growth may fluctuate based on the timing of capacity deployments, suggesting high demand.
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Capital Investment: The reaffirmed \$75 billion capital expenditure plan underscores Google's commitment to expanding its cloud infrastructure.
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Strategic Importance: The rapid growth of Google Cloud contributes to Google's diversification strategy, reducing its reliance on search advertising.
Waymo (Autonomous Driving)
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Emerging Potential: While currently representing a small fraction of Google's revenue, Waymo is considered one of its most promising growth areas.
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Market Opportunity: The autonomous vehicle market is projected to reach hundreds of billions of dollars by 2030 or even more.
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Market Position: Waymo and Cruise are the primary players in the U.S. autonomous taxi market.
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Commercial Operations: Waymo has been commercially operating since 2023, completing 700,000 paid rides and expects between 15 and 20 million rides in 2025.
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Expansion Plans: Waymo is expanding its operations to cities such as Las Vegas, Atlanta, and Miami, and is also testing in Tokyo.
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Strategic Partnerships: Waymo's collaboration with Uber further accelerates its development and expansion.
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Regulatory Tailwinds: Recent news of the U.S. government streamlining autonomous vehicle approval processes is a positive catalyst.
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Market Perception: Waymo's leadership in commercial autonomous driving operations is underestimated, with the market focusing on other technologies like Tesla's FSD.
Antitrust Concerns and Valuation Analysis
Antitrust Risk
Google faces significant antitrust pressure, reflecting its dominance in data collection, search engines, and AI. However, the risk of a forced breakup has decreased following Donald Trump's potential return to the White House.
Valuation
Based on market forecasts, a projected EPS of \$9 for fiscal year 2025 and Google's 5-year average forward P/E ratio of 21.5, a target price of approximately \$195 is calculated, indicating a potential upside of around 20%.
Conclusion
Google's stock appears undervalued based on its financial performance and business fundamentals. Its diversification efforts are gradually lessening dependence on search advertising, and the perceived risks and competition may be overstated. While the author has modestly increased their Google holdings, they intend to maintain a relatively low allocation until market conditions become clearer.
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