Google: Buybacks Are The Way To Go

Summary

• Google has 2 opportunities to show investors that it deserves a higher market valuation.
• Stock buybacks and an advertising rebound are two potential leverage points for Google.
• Google stock may continue to struggle in FY 2023 if the company doesn't create a catalyst for itself.

Alena Kravchenko

Shares of Google (NASDAQ:GOOG) went into a post-earnings slump lately that lasted from the beginning of February until the end of the month as slowing advertising revenue growth went negative in Q4'22. However, Google could soon announce a new stock buyback, as the current $70B buyback is set to be completed by June (at a current buyback rate of $5B/month). I believe that a new, upsized stock buyback could be a strong catalyst for Google's struggling shares. At a P/E ratio of 15.6 X, I believe buybacks make a lot of sense for Google and the stock could go into a new up-leg if Google announces a new authorization. While the advertising down-turn is not yet over, Google's Cloud business could limit the stocks downside potential in FY 2023!

Data by YCharts

Why stock buybacks are the way to go

Possibly one of the biggest and most powerful catalysts that could drive an upside revaluation of Google's shares relates to a potential stock buyback. Google announced a $70B stock buyback last year in April and I believe that the technology company, given its free cash flow prowess demonstrated yet again in the fourth quarter, could afford a major upsize in its stock buyback. In Q4'22, Google reported $16.0B in free cash flow and the tech firm repurchased $15.4B of its own shares in the fourth-quarter. In FY 2022, Google repurchased $59.3B of its shares which included the retirement of 61M Class A shares (worth $6.7B) and 469M Class C shares... on which Google spent the majority of its buyback money in FY 2022, $52.6B. Based on a current buyback rate of $5B/month, the buyback program could be completed in May or June.

Google had $28.1B remaining in its stock buyback authorization (including Class A and Class C stock) as of December 31, 2023 and Google has been an aggressive buyer of shares in recent years. I would expect Google to announce a new stock buyback before the current stock buyback program is exhausted... which I expect to be the case within the next three months.

Data by YCharts

I believe that Google's stock buybacks make a lot of sense at the current valuation and this is a very good opportunity for the tech firm to double down hard on buybacks... because the stock is cheap. Google currently has the privilege of buying back its own shares at a P/E ratio (FY 2024) of 15.6 X which is 24 % below its 1-year average P/E ratio. Additionally, Google's shares are currently trading near its 1-year low, so Google would be well advised to be aggressive now with buying back stock.

Data by YCharts

Google may have a second catalyst in FY 2023

The advertising business is key to Google's operational and financial success, simply because the company generates the majority of its money from its digital advertising business. Unfortunately, Google saw negative top line growth in its all-important advertising business in the fourth-quarter as marketers continued to pull back on ad spending. Inflation, among other things, had led advertisers to spend less money on digital ad campaigns and it resulted in one of the worst financial reports I have seen from Google in recent memory.

Google Search had a negative top line quarter in Q4'22 with revenues declining 1.6% year over year to $42.6B and the advertising market obviously continued to slow in the fourth-quarter. Google's total ad revenues skidded 3.6% year over year to $59.0B which resulted in a very meager top line growth rate of just 1%, despite Google Cloud reporting double-digit revenue growth in the fourth-quarter. If it wasn't for Google Cloud, the tech company may have seen negative growth on a consolidated basis.

A recovery in the ad market is likely to benefit companies like Google or Meta Platforms (META) the most since both companies have unprecedented reach in their digital marketing spheres and could quickly accommodate a return of advertising dollars if marketers have greater confidence in the US economy.

Source: Google

In the meantime, the Cloud business is set to continue to stabilize Google's financial performance. The Cloud business accounted for 9.6% of Google's revenues in Q4'22 and I believe Google Cloud could become a $55B to $60B business by FY 2025 and be responsible for a ~15% revenue share in Google's portfolio of businesses. Two factors could drive gains here: accelerating adoption by enterprise customers aided by an aggressive deployment of AI technology, and growth in market share.

Google's market share in the Cloud infrastructure market has grown from 7% in Q4'20 to 10% in Q4'22... which is an impressive 3 PP gain in just about two years. Google Cloud also remains the fastest-growing business within Google with a growth rate of 32% year over year in Q4'22.

Source: Statista

Risks with Google

The biggest headwind for Google right now remains the slowdown in the advertising market which has weighed on the firm's valuation as well as on its top line growth. If, in the coming quarters, evidence emerges that advertisers continue to be hesitant to spend money on online ads, then Google's core business may continue to suffer and shares may go into yet another down-leg.

Final thoughts

Google needs to do more and engineer catalysts in order for the company's shares to revalue higher. I still believe that Google's enormous free cash flow prowess could result in a major, new stock buyback authorization which could be a catalyst for the company's shares in the next few months. Additionally, a rebound in the advertising business would likely be required for investors to see a positive business development and give them a reason to plan with a reacceleration of Google's top line growth. In the meantime, Google Cloud is stabilizing Google's business and it could possibly prevent the company from posting negative revenue growth on a consolidated level in Q1'23... if the ad market remains weak. With shares still being cheap and trading near 1-year lows, an aggressive buyback would make a ton of sense for Google right now!

Analyst’s Disclosure: I/we have a beneficial long position in the shares of GOOG 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.

Comments

[User 825841]

March 12, 2023: State regulators closed New York-based Signature Bank on Sunday, the third largest failure in U.S. banking history, two days after authorities shuttered Silicon Valley Bank in a collapse that stranded billions in deposits. Legendary Financier Bill Ackman Warns of Massive Bank Runs beginning on Monday.

[DKnewb]

It's time for Google to mature and pay a dividend.

[User 825841]

Waiting patiently, not only for GOOGL, but for all my holdings to gain in value. Profile. The powers to be indicate the turn around will not happen until the last half of 2024.
Translation, more pain to come in 2023 as FED Powell continues raising rates.

The balance scale now is tipping to a recession. Hundreds of businesses on Friday closed below their 52-week lows. Two banks collapsed. Millions of help wanted signs displayed everywhere, yet we are told the labor market is tight. Businesses being forced to close because of a lack of employees. Right now, money is King and high-rate CDs are keeping us in the green. 💲💰

[17939962]

I detest buybacks. They don't put money in my pocket! Buybacks are a shell game : money goes out to buy the shares. But that doesn't affect total income! It doesn't change the value of the company! EPS goes up but how does that help me or anyone else? Theoretically it should increase the value of the shares. But that is only theory, because when I go to sell my holdings I don't know if something will have happened to kill the value of the shares! In other words it adds to my risk. If the company has a surfeit of cash it is much my preference that they issue a dividend. Buybacks encourages management to get involved in manipulating the market value of the shares rather than running the company.

[V_uniqueacc]

@17939962 you obviously don’t understand that buying a “share” of a company means you are entitled to your share of profits. The lower the number of outstanding shares, the higher your share is

[dgi123]

@17939962 It's not just theoretically... when a stock like Google typically trades at an average PE of 23, then when the eps go up, the share price goes up and thus your capital gains increase. Investing is a long game and over the long run, quality growth stocks typically outperform mature slower growing but high yield stocks. Of course they can be exceptions though.

But also if you just don't want capital gains, I think your time is better spent researching dividend stocks rather than whining that Google does buybacks rather than dividends...

[17939962]

@dgi123 Please read above my reponse to V_uniqueacc with regard to the thesis of increasing eps through buybacks - as I mentioned, I believe I understand well the (theoretical?) concept of increasing EPS through share buybacks. Now let me continue : I agree with you on the point that investing is a 'long game'. However I do take exception to the inference that I'm a whiner and I suggest you are resorting to insult rather than rational argument on the issue. I give a lot of thought to composing a comment on the Seeking Alpha platform. In turn I would like to see others present well-thought answers in their comments. Having said that, let me say that as shareholders, I believe we should be the ones to choose the timing for buying or selling our share(s) of the company, not management. What if I don't want a greater share in this company! The right to diversify my portfolio belongs to me (and the other shareholders) and not to management! I remain firmly convinced that share buybacks are a 'shell game'. The inference to gambling is pejorative and deliberate.

[ocbearclaw]

I do t think Google has a very clear and robust decline in share count because it keeps giving its employees fat cat stock plans.

[DKnewb]

@ocbearclaw This!

[Jlexus1953]

Very intuitive article.Google has a Lot of weapons to spur future growth as mentioned starting with buybacks but I would be interested in approximately how much of the 70 billion goes to retire outstanding shares and how much is allocated to stock based compensation. Cloud need to become profitable. Last quarter it lost 480 million on 7.3 billion of revenue. Add based revenue and search should bounce back and employee hiring was out of control and needs to be managed. Additionally management should hopefully be making a 4-5 billion return on their 100 billion in net cash. The argument that Google is undervalued is probably sound and I would add to my position if the stock dips into the 80’s again

[dgi123]

@Jlexus1953 @ocbearclaw What is with all of these people saying "employee hiring was out of control"... Even when they hired all those people, Google still earns more revenue and income per employee than they did in 2019 AND more than the other big tech companies. seekingalpha.com/...

And as they freeze hiring, these metrics will only improve.

And what's the point of vaguely commenting that you don't think the sharecount has been reduced enough. Sure, we all want more. We always more because we're greedy shareholders. But the share count has decreased so it's factually incorrect to imply that it only helps management and not us at all

[Jlexus1953]

@dgi123 thanks for the reply! The record shows that over a 3 year period Alphabet was growing by 40% partly due to the home and work from home effect of the pandemic but they were increasing there workforce from 119,000 to 190,000 employees a 60% increase. 71,000 hires in 3 years begs the question of how you integrate, train, evaluate and insure that this amount of hires is purposeful. I am a strong supporter of buybacks if the purpose is to diminish the total number of outstanding shares but if a significant portion is being utilized to provide employees with stock based incentives and the number of employees is increasing by 60% you can see where the money is going. By the way it’s reported that Alphabet has one of the highest average employee salaries in the tech in industry. Business is not going to grow by 40% annually for a number of reasons so management needs to become more focused on their cost structure

[dgi123]

@Jlexus1953 I understand the numbers you quoted about hiring. What I'm saying is that even after increasing their workforce by 60% over the past 3 years, they still earn more revenue and income per employee than they did 3 years ago AND more than the other big tech companies. This shows that despite the rapid increase in employees, Google is still a very efficient company. Sure we want it to be more efficient, but the actual data from the link above demonstrate that there is nothing to worry about.

Yes much of the buyback money goes towards neutralizing SBC. But the number of shares has still decreased by about 8% over the past 5 years. Sure we always want more. But investing is about being patient and if Google continues to grow revenue and earnings and continues to steadily reduce share count, then I think 10 years from now Google will continue to be a great investment.

Yea we completely agree on that point. No one is saying Google's eps will grow by 40% going forward. But it is estimated to grow by 12-19% annually which means Google is still very much a growth stock

[Valuestocks007]

Long hold for me.. am I the only one who would love them to pay a few pennies a share in dividends.. and start increasing it ...think APPL and MSFT over the last 10 years! Just a thought!

[ocbearclaw]

@Valuestocks007 a small dividend would be great… I would take anything with a high dividend growth rate.

[dgi123]

@Valuestocks007 It's possible they do that in the future, but tbh I've seen many comments whine about the ~1% dividend from V, MA, AAPL, MSFT, etc. People seem to always complain about something so I'm not sure if it matters whether they do share buy backs or pay a few pennies in dividends.

[Valuestocks007]

@ocbearclaw agreed!

[Greenhorn Investor]

Thank you @The Asian Investor

[The Asian Investor]

@Greenhorn Investor Thank you Greenhorn Investor, as always :)

[Scobie]

Most of Googles buybacks go to stock based compensation as opposed to companies like Apple where most buybacks actually reduce shares as I understand.

[dgi123]

@Scobie Apple bought back $90 billion worth of shares in 2022. In contrast, Google "only" bought back $59 billion. Given that, it's not really a surprise that Apple was able to buy back more shares...

[Angel Muro]

I think the same thats why is my 1st position in my portfolio. This company has a lot of ways to rebound its valuation.
Also the company diversifies their bussines models generating synergy beetwen them, for example the release of Pixel smartphone, fit bit divices, etc. I really would like they attempt to launch an operation Systems for computers.

[The Asian Investor]

@Angel Muro You are 100% correct and I believe buybacks are the best use of company cash right now

[TDESQ]

A few things…

Google got fat and happy. Now they need to get lean and hungry.

Cloud needs to turn a profit

Buy backs need to be stepped up at these levels

If you come to the realization that hyper growth will never return but solid 7% growth with the stock price slightly beating the market I am fine with that.

A small Visa like divided isn’t a bad idea but I don’t want this to become IBM

Lastly, stop burning money on moon shots that will never leave the lab and make a penny.

[Google investor]

@TDESQ
Yeah, someone should make sum up all those losses on Other Bets over the years, only on the last 9 months the loss is 4,4 billion USD. What are those people doing all days? Just burning cash and with hardly any tangible output after 10-15 years..Crazy.

[TDESQ]

@Google investor if I didn’t know any better I’d say the secretaries from my old firm were running Other Bets. They were great at collecting a check and doing nothing

[dgi123]

@TDESQ @Google investor You claim that Google got "fat and happy" but provide no facts. Sure, we all wish our companies could do more with less but Google still earns more revenue and income per employee than they did in 2019 AND more than the other big tech companies. So things are not that bad.
seekingalpha.com/...

Where are you getting 7% growth?? EPS is projected to grow at 15% annually going forward. Google is still a growth stock, and very undervalued at that. PEG (FWD) is only 1, which is incredibly cheap.

[Roboviper]

The Cloud business needs to turn a profit.

[bigkoi]

@Roboviper relax. Amazon failed to turn a profit last year and for decades it didn't turn a profit.

The last earnings call showed cloud is closing the gap. Assuming it's continued 30% YOY growth it should turn a profit very soon and continue to grow that profit.

[The Asian Investor]

@Roboviper I believe the business is on a good way, I have no problem with them prioritizing growth for now.

[The Asian Investor]

@bigkoi I agree 100%

[dgi123]

@Google investor Your comment is wrong for several reasons...
1) Google's share buybacks have reduced the shares outstanding by about 7-8% over the past 5 years. I suppose you can still argue that this "isn't enough" but I think it's best to be quantitative and report the facts rather than vaguely whine about it not being enough www.macrotrends.net/...
2) You ask what Google has done for shareholders. How about delivering market beating returns for the past 5, 10, and 15 years? 😂🤑

[Google investor]

@dgi123
Today´s investor does not profit from yesterday's growth. That is pretty basic knowledge.

[i3riank]

@Google investor I agree. I don’t understand how buybacks are better than dividends? $5 billion a month in buybacks…but the share price is the same as it was two years ago. So what have I gained as a shareholder over the past 2 years from those $5 a month?

[Google investor]

@i3riank
Theoretically it should reduce the number of outstanding shares hence increasing earnings per share but Alphabet's stock compensation plan is out of control so instead of going to the owners the money goes to management. It is really awfull.

Alphabet should definitely have a dividend so that shareholders at least get some payback before management take their share.

[Google investor]

The problem with Google buybacks is that they don't reduce the number of outstanding shares enough because management is giving themselves huge amount of stock.

I just wonder what Sundar Pichai is adding to the shareholders. Nothing really.

[The Asian Investor]

@Google investor If you look at free cash flow, you see that Google is a very profitable enterprise :)

[Google investor]

@The Asian Investor
I know Google is a profitable company but management is enriching themselves rather than the owners. That is the main problem.

Sundar is useless, he is not a leader.

[The Asian Investor]

@Google investor CEOs of major tech companies are overpaid, I agree. But that doesn't mean that Google is not an attractive buy...