GOOGL - Google: A Wafer-Thin Q2 Double Beat Meets Lofty Valuation - Buy Sell Or Hold?

2024-07-24 13:23:15 ET

Summary

• Despite recording a double beat, Alphabet/Google's stock price is dipping by ~4% in the aftermath of its Q2 2024 report.
• Alphabet's Q2 earnings report showed strong performance in Search and Cloud, but YouTube ad revenues fell short of expectations.
• Alphabet's operating margin performance remains robust; however, its ongoing AI infrastructure capex spending is impacting cash flow generation, with Q2 FCF down 40% y/y.
• With the stock moving sideways over the past three months, its valuation has moderated quite a bit; however, the digital advertising giant still doesn't offer an attractive risk/reward for long-term investors.

Introduction

Back in April 2024, I downgraded Alphabet Inc. aka Google ( GOOG , GOOGL ) stock to a "Hold" rating at ~$176 per share in light of its Q1 2024 earnings report , citing stretched valuation and unattractive long-term risk/reward:

With Alphabet blowing past consensus expectations for Q1, the stock is off to the races. Now, as a long-term shareholder, I'm enjoying these gains. That said, GOOGL stock is now running well ahead of TQI's fair value estimate and the long-term risk/reward from here isn't attractive enough to warrant fresh buys.

Considering Alphabet's business strength and valuation realities, I'm moving to the sidelines on this stock. We will continue to own all of our shares, but we won't be buying again until GOOGL experiences a sizable time or price correction.

Key Takeaway: I rate Alphabet "Neutral/Hold" at $177 per share.

Source: Google Is Alive And Well, But I'm Moving To The Sidelines (Rating Downgrade) .

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