Despite what seemed a stellar quarter, the market punished Alphabet Inc.'s (NASDAQ:GOOG) (GOOGL) unfairly with a downwards price action, instead of the boost the company well deserved. The stock had slid by -3.6% to $2,285.89 on 27 April 2022, while continuing its sideways action in the past week. Nonetheless, we are also glad that the punishment seems to be over by now, given how other FAANG stocks, such as Amazon (AMZN) and Netflix (NFLX), have suffered even more in recent weeks.
In addition, we reckon that the current market pessimism proves to be a great opportunity for tech investors, who are looking to add more exposure to this blue-chip stock, given that it is trading at $2,321.01, nearing its 52 weeks low of $2,196.49. In spite of the impending recession, we think the possibility of a further retracement is unlikely, given how well the company has been performing historically. As a result, we advise long-term investors to add more during this dip, since its FY2021 highs have been digested by the bearish market.
GOOG Revenue and Net Income
During the pre-pandemic, GOOG grew its revenues at an impressive CAGR of 21.48% from FY2016 to FY2019. After a slight slowdown in YoY revenue growth in FY2020 at 12.7% during the heights of the COVID-19 pandemic, the company managed to more than catch up with it in FY2021 at a YoY rate of 41.1%. Furthermore, GOOG reported excellent revenue of $68.01B and net income of $16.44B in FQ1'22, representing YoY growth of 22.9% and a slight decline of -8.3%, respectively. Nonetheless, given that FY2020 and FY2021 are highly unusual years, to say the least, GOOG's net income of $16.44B in FQ1'22 still represents an impressive CAGR of 35.22% in the past three years.
As a result, we are puzzled by the negative market reaction to its latest earnings call. However, we would also like to note that the sell-off is likely over by now, given the normalized trading volume and steady price action in the past week.
GOOG Revenue By Segment
As evident from the chart, we can see that GOOG has continually delivered on its key operating metrics, especially its Google Search and Google Cloud segments. These two represented the top two YoY growth by 24.1% and 45%, respectively. We are also encouraged that its revenues have not been overly affected by the reduction in Google Play commission from 30% to 15% as we had originally expected.
Nonetheless, one of the reasons that could have contributed to the lagging market sentiment is the apparent deceleration of revenue growth for YouTube Ads, with only 15% YoY growth in F1'22, as compared to its previous 50% in FQ1'21. However, we would like to highlight again, that normalization of pandemic growth is natural as no company would be able to sustain that kind of growth post reopening cadence.
GOOG FCF, and FCF Margins
For FQ1'22, GOOG also reported robust Free Cash Flow (FCF) of $15.32B, representing an excellent improvement YoY of 14.7%. The company also reported a healthy FCF margin of 22.5%, at a slight decline YoY by 1.6 percentage points. Nonetheless, GOOG still owns a massive cash and equivalents war chest of $20.89B in the last quarter, despite its aggressive Capex expenses of $9.79B for FQ1'22.
GOOG Capex And Cash/ Equivalents
As a result, we are not concerned about the company's projected YoY increase in its Capex expenses for the rest of FY2022, which is mostly attributed to its cloud computing segment. We reckon that the segment will be one of its most important revenue drivers moving forward, since the global cloud market is expected to grow from $445.3B in 2021 to $947.3B in 2026, at a CAGR of 16.3%. Therefore, long-term GOOG investors should be happy to see the company continuously investing in its revenue growth and product innovations moving forward.
GOOG R&D, Selling/Marketing, and General/Administrative Expense
It is also evident that GOOG is still looking to expand its offerings in the industry, given its continually increasing operational expenses. In FQ1'22 alone, the company spent $9.12B and $5.83B in R&D and selling/ marketing expenses, respectively. It represents 21.7% and 28.9% YoY growth, with growing talents as its primary driver for the additional expenses. It is also encouraging to see a growing number of flexible work opportunities worldwide as a result of GOOG's increased headcount, which will definitely support its innovation across multiple channels and segments.
GOOG Projected Revenue And Net Income
GOOG is expected to report revenue and net income growth at a CAGR of 13.18% and 15.24% over the next five years, respectively. Consensus estimates also project that the company will report revenue of $299.31B and net income of $75.13B for FY2022, representing a YoY growth of 16.1% and a decline of -1.1%, respectively. We would also like to highlight that GOOG's projected net income margin of 25.1% in FY2022 is a massive improvement from its pre-pandemic normals of ~21%, given the monster year it had in FY2021 at 29.5%. As a result, it is evident that GOOG is still well-positioned for robust growth moving forward.
In the meantime, we encourage you to read our previous article on GOOG, which would help you better understand its position and market opportunities.
GOOG 3Y EV/Revenue and P/E Valuations
GOOG is currently trading at an EV/NTM Revenue of 4.61x and NTM P/E of 19.67x, lower than its 3Y mean of 5.23x and 27.11x, respectively. The stock is also trading at $2,321.01 on 13 May 2022, down 23% from its 52 weeks high of $3,030.93. Though current prices still represent a 71% difference from its pre-pandemic levels, we reckon that GOOG deserves the premium, given its excellent performance in FQ1'22 despite the multiple temporary headwinds.
GOOG 5Y Stock Price
In addition, GOOG's stock price has risen by 148.68% in the past five years, with a Five-Year Stock Price Total Return of 147.1%. As a result, long-term GOOG investors may still add more exposure to this blue-chip stock now, given the current moderation in valuations and stock price.
Therefore, we rate GOOG stock as a Buy for long-term investors.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of GOOG, FB, AMZN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.