Where Will Google Stock Be In 10 Years? (NASDAQ:GOOG) (2024)

Alphabet’s Google (NASDAQ:GOOG)(NASDAQ:GOOGL) has gradually become a critical part of everyday life over the past decade. Not only has Google become synonymous with “search”, its wide array of services, ranging from Google Maps to Google Cloud, has also helped in taking care of almost everything, big or small, on a daily basis to some extent.

At this year’s Google I/O event held in May, the company placed additional emphasis on the build-out of its AI competencies and how it would be a “fundamental technology” across its portfolio of services and products offered. Google will also be investing aggressively in its Cloud operations to maximize capitalization on growing opportunities available within the sector. The strategic developments foreshadow where the company is headed in this decade – becoming better, more efficient, available, and innovative in taking care of users’ everyday needs. In addition to benefiting from the global digital shift, Google’s increasing competency in AI and cloud-computing technology will also inadvertently become a driver of this shift, paving the way for further growth in years to come.

Google’s increasing prominence shows in the stock and underlying business’ performance. Google’s record-setting performance in the first half of the year across all main segments indicates that the consolidated business remains in a robust growth phase. It also sets the right tone for further growth stepping into the second half with the holiday season driving demand, as well as in the years to follow given the global transition to digital as discussed in our previous coverage on the stock. And over the past 12 months, Alphabet's stock has appreciated by more than 80%. The stock’s gains continue to lead the FAANG pack, while consistently outperforming the broader market despite mounting headwinds that have fanned volatility in recent weeks. The stock’s uptrend remains a testament to investors’ optimism on Google’s long-term growth prospects.

While there may be other candidates exhibiting higher growth potential as industry demands continue to evolve, Alphabet remains one of the safest and most rewarding long-term investment picks considering the critical role it plays in the key trends that underpin this decade’s digital transformation. And the stock’s recent pullback driven by volatility in the broader market makes it a good time to add for the long-term investor.

Two Key Trends that will Drive the Decade’s Digital Shift

We see the critical role that Google plays in the key trends that will drive this decade’s digital transformation a catalyst for a “flywheel effect”. On one hand, the world’s increasing reliance on technology has bolstered demand for Google’s wide range of products and services. The last 18 months of recurring pandemic lockdowns has resulted in a profound shift in consumer behaviour towards digitization. The pandemic is estimated to have accelerated digitization by at least three to four years, as the world steps into a rapid shift towards digital channels like YouTube and the Google search engine for information and interaction. Small- and medium-sized businesses (“SMBs”) have also recognized the importance of having an online presence in order to survive in the new age of technology, while large corporations look to replace their legacy IT infrastructures with cloud to support a streamlined and cost-efficient business model in the increasingly hybrid corporate culture. And Google has been a significant beneficiary of these digital trends, as evidenced in the tremendous growth observed across its leading digital ads and cloud business segments in recent quarters.

On the other hand, Google’s commitment to innovation and the integration of AI and cloud-computing technology across its offerings to make them more available and accessible will further propel the said digital shift. The efforts will continue to make the world more connected and more efficient than ever before, thus ensuring a cycle of reinforced demand that will persist into the long-run.

Increasing AI Integration

Enhancements to AI technology remain at the core of Google’s long-term growth strategy. Over the years, significant improvements have been made to Google’s AI competency across its services and products. To name a few examples, search results across the Google search engine and YouTube have become more accurate. The Google Nest suite of smart home devices have become smarter and better acquainted with users’ preferences. And route guidance suggestions on Google Maps have become more reliable. But Google’s AI competencies do not stop with these achievements. Instead, the company remains committed to furthering the development of AI technology to become better and more efficient in taking care of users’ everyday needs.

In Google’s I/O event held in May, the company introduced the “Multitask Unified Model” (“MUM”), an AI-enabled visual search tool. While image-recognition search tools have been widely used for years now, especially in e-commerce and image sharing social media mobile apps like Pinterest, MUM takes the technology to the next level. MUM is “multimodal”, which allows users to incorporate text, imagery and audio in a single search, while also being multilingual, which allows information that is not produced in the same language as the search to be considered and brought to the user.

“Language Model of Dialogue Applications”, or “LaMDA”, was also unveiled at this year’s I/O event. LaMDA is trained to engage in conversation and dialogue to help Google better understand the “intent of search queries”. While LaMDA remains in research phase, the ultimate integration of the breakthrough technology into Google Search will not only make the search engine more user-friendly, but also enable search results with greater accuracy.

The improvements to Google Search enabled by AI only makes the search engine even more useful and in higher demand than it already is – Google Search currently dominates the search engine market with close to 70% of market share, and remains the most-searched term on rival search engine Bing. And the anticipated increase in the search engine’s traffic will drive further long-term growth in Google’s core digital advertising business, which already leads the industry by representing close to 30% of the global market share.

AI technology also underpins the success of Google’s Other Bets investments. DeepMind, an AI subsidiary, has facilitated breakthrough solutions for complex problems found across industries like healthcare. The subsidiary’s latest achievement includes the AI-enabled “AlphaFold Protein Structure Database”, which includes data on almost every sequence protein known to science, solving a long-time challenge in biology research known as the “protein folding problem”. Google’s self-driving technology subsidiary, Waymo, also relies on AI and machine learning to drive its vehicles. To date, Waymo has already facilitated tens of thousands of rides in Phoenix, and has recently received permits to expand its operations to parts of San Francisco and San Mateo counties.

It is evident that Google understands the decade’s assignment – AI will be used more frequently and ubiquitously going forward. The technology will be incorporated across all industries, ranging from consumer electronics and automotive, to healthcare and digital media. And Google’s critical role in AI development will not only allow it to participate in the high-growth opportunities that already exist within the sector, but also create new ones through continuous innovation. Enhancements to AI competency will also make Google better at what it already does, driving an endless loop of demand and growth into the long-run.

Growing Reliance on Cloud

In the last ten years, we saw cloud-computing evolve from being a “cutting edge experiment” to an emerging technology. And in this decade, increasing adoption of cloud-computing across all organizations, big and small, will make it the foundation of digital transformation. Cloud implementation was a primary driver of tech investments across 60% of corporate organizations over the last two years. Close to 50% of which were attributable to start-ups, a testament to cloud’s fundamental role in fueling innovation. And the trend is expected to persist into the long-run as the emerging technology transforms into a “business essential”.

Cloud-computing continues to play a critical role in supporting a streamlined and cost-efficient business model in the era of digitization, especially with the increasingly hybrid work environment that has made cloud-enabled virtual collaboration a post-pandemic norm. For instance, Google Workspace, a cloud-based collaboration tool, has benefited from a steep surge in demand from the enterprise sector looking to combat the rising cost and productivity challenges of hybrid work arrangements in recent quarters. The global cloud-computing market is expected to reach a market value of more than $1.6 trillion by the end of the decade, representing growth at a compounded annual rate (“CAGR”) of close to 16%.

Cloud has also become essential in the world of increasing data generation. The emerging technology plays an important role in making sense of insights collected on a daily business, and the key trend underpins the continued success of Google Cloud. The business segment’s expertise in generating real-time data analytics through “BigQuery”, a low-cost cloud-based analytical tool, has helped to drive strong customer acquisition growth in recent years across industries ranging from healthcare to casinos and industrial manufacturers. With only 4% of the corporate scene saying they have the sufficient means to make use of their data, Google Cloud benefits from significant headroom for additional growth in coming years.

The recent surge in ransomware attacks also underscores the importance of cybersecurity in the age of digital transformation, where cloud also has a significant role to play. Close to 40% of the private sector has indicated cybersecurity improvements as a top priority, underpinning a continuation of demand for cloud-based solutions as we approach the next decade. And Google is well-equipped to capitalize on this key trend, having spent billions of dollars over the last two decades into developing some of the most secure computing systems and solutions in the world. For instance, “BeyondCorp”, a cloud-based “zero trust” approach operated by Google Cloud, allows users to engage in secure work virtually in untrusted networks without the use of traditional VPN. To date, the zero trust model has helped Google Cloud procure customer relationships with reputable names including the MLB and the U.S. government.

The emergence of cloud-computing technology has redefined how businesses operate by enabling greater costs and operational efficiencies, while strengthening cybersecurity and analytical abilities in the data-driven era. The world’s increasing reliance on cloud, coupled with Google’s improving competencies in the field makes it well-poised for further market penetration through to the decade ahead.

Revisiting Overall Financial Prospects

In our last coverage on the stock, we had done a deep dive into each of Google’s revenue streams and discussed how key digital transformation trends will drive accelerated growth for the consolidated business over the next five years. And Google’s 10-year business outlook will, in summary, be an extension of the previously discussed five-year growth trends. The extension of our optimistic outlook on Google’s long-term growth prospects are primarily driven by the fundamental role that it plays in laying the digital foundation for coming years through continuous innovations in AI and cloud.

Google’s consolidated revenues are expected to total $237.8 billion by the end of 2021, with further growth at a CAGR of 12.7% towards $788.5 billion by 2030. The majority of this growth will continue to be led by advertising revenues, which is expected to surge at a CAGR of 8.7% from about $188.8 billion in the current fiscal year to $436.7 billion by the end of the decade. The growth assumption applied in predicting Google ad revenues is consistent with the rise in demand for its suite of distribution channels, including Google Search and YouTube, enabled by AI-powered improvements as discussed in earlier sections. Google Cloud revenues are also expected to step into a decade of rapid growth underpinned by accelerated adoption of the technology, as well as Google’s innovations in the field to further customer acquisition rates. The segment is expected to generate revenues of $19.3 billion by the end of the year with growth at a CAGR of 28.8% towards $243.1 billion by 2030, and represent up to 30% of the consolidated revenue mix over the forecasted period compared to 7% in 2020.

The company’s consolidated cost structure will also remain largely consistent over the forecasted period, with the exception of R&D spending which will likely scale back mildly once the current investment cycle on cloud development and other technical infrastructure moderates from 2025 onwards. As a result, operating margins are slated for further expansion from the current sub-25% range towards 30% by the end of the decade.

Coupled with other nominal non-operational income and expenses, Google is forecasted to generate consolidated net income of up to $59.6 billion by the end of 2021, with growth towards $229.7 billion by 2030.

i. Base Case Financial Forecast:

Google Stock Valuation

Given Google’s growth trajectory has not materially changed from our previous analysis, our 12-month price target remains in the range of $2,882.98 to $3,123.18 (please visit here for further detail on our valuation analysis).

i. Valuation Analysis 12-Month Price Target:

ii. Sensitivity Analysis:

And in the long-run, Google’s valuation exhibits potential of reaching well over $4,000 per share based on the high-growth prospects across its business segments, as well as the technological and monetary resources available for use at Google’s disposal to capture these opportunities. Specifically, our valuation analysis projects a long-term price target of $4,160.98, which represents upside potential of close to 55% based on the last traded share price of $2,675.30 on October 4^th. Our valuation analysis applies an exit multiple of 16.1x applied on projected terminal year EBITDA, which is consistent with projected U.S. GDP growth to reflect Google’s long-term cash flow growth beyond the 10-year forecasted period. Since the growth rate of an economy reflects the contributions of higher growth firms like Google, the consistency further corroborates our analysis on Google’s long-term valuation prospects.

i. Long-Term Valuation Analysis:

Conclusion

Google’s fundamental role in facilitating this decade's digital transformation underpins sustainable long-term growth to its valuation. Although the stock has already almost doubled over the past year, it could still make a rewarding long-term investment pick given Google’s main businesses are still well-positioned to capitalize on high-growth opportunities ahead.

Livy Investment Research