Google Reported 37% Earnings Growth in Q3

Google shares GOOGL jumped 6% after reporting significant growth in revenue and EPS. I still remember how “experts” were saying Google is losing steam because of ChatGPT, regulation and competition from rivals, none of those seem to pose any threat to Google so far. Here are the developments in this quarter:

Revenue grew 16% YoY to $88.3 billion
EPS grew 37% YoY to $2.12 per share
Free cash flow declined from $22.6 billion a year before to $17.637 billion due to significantly more investment in cloud infrastructure
Operating margin increased from 28% to 32%, this is amazing because it reflects the efficiency & profitability of the company is improving
Google cloud revenues increased 35% to $11.4 billion, with $1.947 billion in operating profits, reflecting a 17% operating margin, a record profitability. It is nice to see Google cloud is gradually becoming a great contributor to the company’s bottom line.
Stock based compensation only up 1.7% compared to a year before, up from 5.743 Billion to 5.846 billion, significantly lower than the 5-year average growth of 17%, management has done a great job getting this under control
Waymo is driving more than 1 million fully autonomous miles and serves over 150,000 paid rides. Even though Waymo’s robo taxi service contributes insignificant amount of revenue overall, it has great potential and I am excited to see its future development. I personally think this is more promising than Tesla’s upcoming robo taxi service, and Google investors get a share of this without paying any premiums on the stock price.

I continue to believe Google will out-compete its rivals with its superior services backed by their big data advantages. Google’s 90% market share in the search engine market allows the firm to collect the most data among its peers, giving it significant advantages to get better insights and train better AI models, which will in turn improve Google’s services even more, forming a positive feedback loop.

The DCF estimated share value is $173, implying a CAGR of 9%. Here are the assumptions:

Latest TTM FCF $55.827 billion
FCF growth rate of 17% (5YR avg of 17.2%)
Share repurchase of 2.25% (5YR avg 2.25%)
Future P/FCF of 25 (5YR avg 26.44)
Discount rate of 10%

I believe this valuation is on the lower end because Google is spending huge amount of free cash flow purchasing equipment to build cloud infrastructures, I expect these investments will yield great return over the long term. Overall I think the stock is trading around fair value after the price increase today.

You can also see my past Google stock analysis using this link.

Holdings Disclosure

SoloFIRE GOOGL & GOOG ownership: 13% of portfolio
SoloFIRE GOOGL Average Cost Paid: $109
GOOGL price as of writing: $174.46
Holding time: 3 years

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DISCLAIMER: Solofire is not a registered financial advisor. This post contains author's personal opinion only and it should NOT be considered financial advice.