To The Moon

$Alphabet(GOOG)$

Google's stock has dropped 8% following the release of its Q4 2024 earnings report. Despite strong growth numbers, the market continues to sell off shares in after-hours trading. In today’s video, I’ll break down the key takeaways from Google's earnings, explore why the stock is declining, and discuss whether it's a buying opportunity.

Earning Overview

As always, I reviewed Google's Q4 earnings report and highlighted the most important figures. Google's total revenue grew 12% year-over-year to a record $96.5 billion. Google Services revenue increased 10% to $84.1 billion, while Google Cloud saw impressive 30% growth, reaching $12 billion. The company also reported a 31% rise in operating income and a 28% increase in net income, with earnings per share (EPS) climbing 31% to $2.15.

Clearly, Google’s revenue is still experiencing strong double-digit growth, and Google Cloud had a particularly strong quarter. The company’s profits also expanded significantly, up 30% year-over-year. Google’s CEO expressed confidence in future opportunities and announced plans to invest approximately $75 billion in capital expenditures (CapEx) in 2025—significantly higher than the $52 billion spent in 2024. This substantial increase in spending could be a key factor in the stock's decline, as it will likely reduce free cash flow.

Fundamental Analysis

Now, let’s look at the full-year 2024 highlights. Revenue reached $350 billion, growing 14% year-over-year. Operating income came in at $12.4 billion, with the operating margin increasing by 5% to 32%. Net income surpassed $100 billion for the first time, with EPS reaching $84.

Breaking revenue down by segment, Google Search grew 12.5%, YouTube revenue increased 14%, subscriptions rose 8%, and Google Cloud surged 30%. However, Google Network revenue declined by 3%. Most business segments are showing healthy growth, which is an encouraging sign.

Looking at operating income, Google Services generated $32.8 billion, up 23% year-over-year, while Google Cloud more than doubled its operating income to $2.1 billion. However, Google Cloud’s operating margin remains lower than those of Microsoft Azure and AWS, meaning there’s still room for significant profitability improvements. As Google Cloud continues to expand at a 30% annual rate, its operating income should become an increasingly important contributor to the company’s overall financial performance.

Free Cash Flow

Moving on to the cash flow statement, Google reported record-breaking operating cash flow of $39 billion for Q4—more than doubling the $19 billion recorded in the same period last year. For the full year, operating cash flow reached $125.3 billion, up 24% year-over-year.

Another notable point is that stock-based compensation has remained relatively stable. In Q4, it rose by just $160 million to $5.8 billion, and for the full year, it increased by only $300 million to $22.8 billion. While still a large expense, its slower growth suggests it may become less significant over time if operating cash flow continues to expand at a faster pace. Lastly, Google's CapEx for Q4 totaled $14.3 billion, with full-year CapEx reaching $52.5 billion.

For 2025, Google anticipates capital expenditures to rise to $75 billion, a significant jump from the $52 billion spent in 2024. This increased spending will put pressure on Google’s free cash flow. For instance, in 2024, the company generated approximately $73 billion in free cash flow, compared to $69 billion in 2023—an increase of just $4 billion year-over-year, despite a $24 billion rise in operating cash flow. Essentially, higher capital expenditures are nearly offsetting the growth in operating cash flow, leading to stagnation in free cash flow growth.

Google is primarily using its free cash flow to return value to shareholders, with $62 billion allocated for share buybacks and $7 billion paid in dividends. This means the company returned nearly all of its free cash flow—around $70 billion—to shareholders in 2024.

Guidance

Now, looking at some key performance indicators (KPIs), Google Cloud continued to achieve record-high revenue in Q4. However, when examining the percentage growth rate, it shows signs of deceleration. This slowdown could be another factor contributing to the after-hours decline in Google’s stock, as investors on social media appear concerned about weaker growth compared to previous quarters. On a trailing 12-month basis, Google Cloud’s revenue growth rate also softened in Q4.

Shifting focus to YouTube, ad revenue reached approximately $36 billion over the past 12 months, hitting new record highs. Similarly, Google Search generated $98 billion in revenue over the same period, continuing its steady growth.

Meanwhile, Google Cloud’s operating income has now reached $6.1 billion on a trailing 12-month basis. On a quarterly level, Q4 was a record high for the segment, with $2.1 billion in operating income. This suggests that Google Cloud’s profitability is expanding rapidly, and it is likely to contribute even more to Google's overall earnings moving forward.

Valuation

Now, let's discuss valuation. In after-hours trading, Google’s stock is down about 8%. With $125 billion in operating cash flow generated in 2024, the stock is currently trading at roughly 18 times operating cash flow. Given Google's heavy capital expenditure investments, which significantly impact free cash flow, operating cash flow appears to be the most reliable metric for valuing the company at this time.

When a company is heavily investing in growth capital expenditures (CapEx), using operating cash flow as a valuation metric can be more insightful. Looking at Google's historical data via Stock Unlock’s tool, we see that over the past decade, Google's average price-to-operating-cash-flow ratio has been about 17.9. In after-hours trading, the stock is currently priced slightly above this 10-year average, suggesting it might be trading around fair value.

I also conducted a reverse discounted cash flow (DCF) analysis to understand what the market is currently pricing into Google’s stock. Assuming operating cash flow growth over the next five years, the market appears to be factoring in an annual growth rate of about 10.7%, with 2% annual share buybacks, 10% dividend growth, and a return to the five-year average price-to-operating-cash-flow ratio of around 17.3. Essentially, if Google can maintain this 10.7% annual growth in operating cash flow, the stock could potentially offer a compounded annual growth rate (CAGR) of about 10%.

Market Sentiment

The big question is whether these assumptions are too pessimistic or optimistic. Given that Google Cloud is expanding rapidly and other business segments are performing well, I believe there’s a good chance that Google can sustain or even exceed 10% annual growth in operating cash flows over the next five years. For context, in Q4 2024 alone, operating cash flows grew by about 24% year-over-year, and for the entire year, they were up by 24%. So, a forecast of 11% annual growth seems conservative relative to recent performance. If Google can maintain or accelerate this pace, the stock could deliver over 10% annual returns going forward.

During the Q4 earnings call, the CEO mentioned some exciting developments. Waymo, Google's autonomous vehicle division, will expand to Tokyo, Austin, Atlanta, and Miami this year, marking its international debut. While Tesla often claims the lead in autonomous driving, Waymo already operates fully autonomous vehicles providing rides in U.S. cities and now internationally, potentially positioning Waymo as a frontrunner in this space.

Additionally, the company stated that CapEx is being allocated towards building AI capabilities and expanding data centers. Interestingly, the CFO noted that data center capacity was constrained in Q4, suggesting that Google Cloud’s revenue growth could have been even higher if not for these limitations. This bottleneck in capacity is a key reason why CapEx is projected to increase significantly to $75 billion in 2025—up from $52 billion in 2024—as Google scales to meet demand. The CEO also mentioned that the cost of AI is decreasing, enabling the company to integrate AI more broadly and cost-effectively, which could accelerate innovation and adoption.

Conclusion

Overall, Google delivered a strong quarter that surpassed my expectations. Despite this, the market remains cautious about the effectiveness of the $75 billion CapEx investment, contributing to the stock's 8% decline in after-hours trading. The slight deceleration in Google Cloud’s revenue growth may also be pressuring the stock, though I believe it’s not a significant concern.

Currently, Google is trading at its 10-year historical average price-to-operating-cash-flow ratio, which suggests fair valuation. While the stock isn't at a bargain price, it could still offer annual returns slightly above 10% going forward, making it a reasonable investment but not an exceptional deal at current levels.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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