GOOG at $150: Reaching My Target and Why It Might Be a Buy Now
GOOG 0.00%↑ has taken a hit recently, down nearly 9% in the past month, significantly underperforming other mega-cap stocks. The reasons for the drop center around investor worries about several key issues: potential disruptions to its core search business from AI, slower ad revenue growth, and high CapEx spending on AI infrastructure that could drag down future returns. Investors are worried that Alphabet’s core search business is at risk of being disrupted by AI. While AI overviews in search are showing higher engagement, there’s uncertainty about how well Google can monetize AI-driven search. The fear is that AI will cannibalize traditional ad revenue in search results, which has been the backbone of Alphabet’s earnings. Additionally, there are concerns that the company’s increased infrastructure spending on AI and cloud could fail to deliver the necessary returns, putting pressure on margins and returns on capital.
On the surface, these concerns seem valid, but there’s a strong case that investors are being overly cautious. First, search revenue hasn’t shown any signs of being cannibalized by AI so far, and growth in search was actually stronger than expected last quarter. Second, Alphabet is still a dominant force in digital advertising, with verticals like retail and financial services showing strong momentum. YouTube’s slight miss last quarter can be seen as temporary noise rather than a sign of a long-term issue. Alphabet has plenty of room to optimize its operating expenses, which could help offset the heavy CapEx spending that has been a concern for investors. One underappreciated aspect is how Alphabet can leverage AI to improve internal efficiencies, particularly in developer productivity and task automation. Pichai has hinted at AI’s potential to significantly boost productivity, especially within Google’s own workforce. As AI tools like GitHub Copilot and other machine learning models continue to mature, they can streamline the work of developers, speeding up code creation and reducing the need for manual labor on routine tasks. This has the potential to shrink operating costs by reducing reliance on human labor in certain functions. While CapEx remains high, Alphabet has a lot of flexibility to reduce operating costs by integrating AI more fully into its own operations. If the company can execute on these internal optimizations, it will free up resources and improve margins, providing a strong counterweight to investor concerns over the current spending levels.
In my previous piece, I discussed Alphabet’s strong Q2 earnings and pointed out that an attractive entry point for the stock would be around $140-$150 per share. Today, we’ve hit that level, and at this price, investors could see double-digit IRR even if forward multiples contract. Specifically, even if the FCF multiple drops to 20x—still very reasonable for a dominant company like Alphabet—investors can still generate solid returns at current prices. Of course, there is always a risk that the bear case could play out. The main concern is that consumer behavior could shift, with people opting to use LLMs instead of Google’s traditional search. Even if Alphabet’s own LLMs become the preferred way to search, there’s a risk that the margin profile of AI-driven search could be much weaker than its current core search business. But as of now, there are no signs that this shift is happening.
Given the current valuation and the fact that Alphabet’s business fundamentals remain solid, the stock looks like good value at these levels. The recent pullback has made it cheaper, and for long-term investors, this could be an opportunity to buy into one of the most dominant tech companies at a more attractive price point.
Disclosure: Author has no position in GOOG but may initiate one soon without prior notification