Alphabet Stock Beats S&P 500 by 37% Since 2023, Where Next?

Alphabet (Google) has outperformed the S&P 500 by 37% since the beginning of 2023, with its stock gaining approximately 66% compared to the index’s 29% rise during the same period. Despite this strong performance, the stock is currently trading 9% below its fair value of $162, according to Trefis’ estimate.

GOOG stock has experienced significant volatility, increasing by 60% from $90 in early January 2021 to around $145 currently. However, its performance has not been consistent, with returns of 65% in 2021, -39% in 2022, and 59% in 2023. In comparison, the S&P 500 had returns of 27% in 2021, -19% in 2022, and 24% in 2023, indicating underperformance by GOOG in 2022.

Beating the S&P 500 consistently has been challenging for individual stocks in recent years, including other heavyweights in the Communication Services sector like META, NFLX, DIS, as well as megacap stars TSLA, MSFT, and AMZN. In contrast, the Trefis High Quality Portfolio, consisting of 30 stocks, has outperformed the S&P 500 each year over the same period, providing better returns with less risk.

The company exceeded street estimates in Q4 2023, with revenues rising 13% year-over-year to $86.3 billion, driven by growth in the Google advertising segment, Google Cloud, and Google subscription, platform & devices categories. Total expenses as a percentage of revenues decreased, leading to an operating margin of 27% and a 52% increase in net income to $20.7 billion.

In FY 2023, Google’s top line grew 9% year-over-year to $307.4 billion, mainly due to growth in Google Search & other, Google Cloud, and Google Subscription, platform & devices divisions. Google search contributes more than 55% of total revenues. The operating margin slightly improved, resulting in a net income of $73.8 billion, up 23% year-over-year.

Looking ahead, the trend is expected to continue in Q1, with estimated revenues touching $342.2 billion in FY 2024. The net income margin is likely to see a slight improvement, leading to a net income of $83.1 billion, an annual EPS of $6.76, and a P/E multiple just below 24x, resulting in a valuation of $162.