Google: We could see a $100 billion share buyback in 2023 (NASDAQ:GOOG)

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Alphabet (NASDAQ:NASDAQ:GOOG) is considering productivity gains and potentially more near-term job cuts in a bid to generate profits and counter growing headwinds in the digital advertising industry. As Google drops its cloud business return To offset at least some declines in growth in the advertising segment, I think the company could announce a $100 billion share buyback next year. Google has more than enough free cash on its balance sheet to exhaust its $70 billion takeover authorization and Google shares continue to trade at a very compelling PE ratio!

20% efficiency gains

Google CEO Sundar Pichai recently said he plans to steer the company toward 20% productivity gains in a bid to offset the drop in advertising business the company blamed in the second quarter. to have slowed the growth of its turnover. Although Google is still seeing strong revenue growth in the cloud space – 36% year-over-year growth in Q2’22 – Google is apparently bracing for tougher times ahead. With revenue growth slowing from 62% last year to just 13% in the second quarter of 2022, Google must find new ways to get investors interested in the stock again. One of the main ways to unlock value, in addition to seeking productivity gains, could be a significant increase in company stock buybacks.

Google could easily pay for a $100 billion share buyback

In April this year, Google said its board had authorized a $70 billion share buyback. The $70 billion share buyback announced a few months ago followed a $50 billion share buyback in the year-ago period, showing a 40% increase in authorization to buy back shares. Stock buybacks are a useful tool for tech companies like Google that are struggling with growth but sitting on a huge pile of cash.

At the end of the second quarter, Google had $125 billion in cash on its balance sheet, of which $107 billion (86%) was invested in marketable securities. Based on the amount of cash immediately available to Google, the company could pay 1.8 times its current $70 billion share buyback without even having to use any of its free cash flow.

Alphabet Balance Sheet Q2'22

Alphabet Balance Sheet Q2’22

Another way to look at Google’s takeover possibilities is to ask how much of Google’s free cash flow would be needed to execute the $70 billion share buyback. So, let’s take a look.

Google has generated $65.2 billion in free cash flow over the past four quarters. Average free cash flow generated per quarter was $16.3 billion, or $5.4 billion per month. To exhaust Google’s $70 billion stock buyback would take just over a year of the company’s current free cash flow (13 months to be exact).

millions of dollars

Q2’21

Q3’21

Q4’21

Q1’22

Q2’22

Revenue

$61,880

$65,118

$75,325

$68,011

$69,685

Net cash flow generated by operating activities

$21,890

$25,539

$24,934

$25,106

$19,422

Less: purchases of tangible capital assets

($5,496)

($6,819)

($6,383)

($9,786)

($6,828)

Free movement of capital

$16,394

$18,720

$18,551

$15,320

$12,594

Free cash flow margin

26.5%

28.7%

24.6%

22.5%

18.1%

(Source: Author)

The calculation for funding a possible $100 billion share buyback assumes that Google’s free cash flow doesn’t increase…which isn’t a very realistic assumption. Google has generated a free cash flow margin of 23% over the past twelve months and the tech company is expected to grow revenue by 12% next year to $325.6 billion.

Assuming the free cash flow margin doesn’t change, Google could generate about $75 billion in free cash flow next year…that’s about $10 billion more than Google’s LTM free cash flow. The calculation specifically does not include a potentially higher free cash flow margin due to the expansion of the company’s cloud business or a rebound in the digital advertising industry. For these reasons, I think a free cash flow estimate of $75 billion for fiscal year 2023 is a very reasonable assumption.

If Google again increases its stock buyback by 40% in fiscal 2023, the tech company could be on the verge of announcing a $100 billion stock buyback in the first half of 2023. $100 billion stock would also be easily covered, either by Google’s free cash resources, its estimated free cash flow for fiscal year 2023, or a combination of the two.

Cheap valuation

Google is expected to have EPS of $5.96 in fiscal year 2023, which translates to a PE ratio of 18.8X. Based on both earnings and cash flow available cash, Google shares are very attractively priced…and both ratios are below the 1-year average (as indicated by the dotted line in the chart below). Google’s low stock valuation may actually drive the decision to increase Google’s share buyback permission.

Chart
GOOG PE Ratio (forward 1y) data by YCharts

Risks with Google

Google’s biggest business risk is that the digital advertising market continues to cool while at the same time cloud revenue growth slows. For Google, that could mean an even stronger need to focus on productivity gains and share buybacks as a way to unlock value and bring Google shares back to a new upswing. What would change my mind about Google is if the company saw a significant drop in free cash flow or margins.

Final Thoughts

Google has increased its share buyback by 40% to $70 billion this year and, given the challenges in Google’s business, I see the company increasing its buyback to almost $100 billion next year. . The tech company clearly has both the free cash flow and available cash resources to do just that…and with revenue growth moderating, buyouts could become a key strategy for Google to make the Interesting share again for investors.

With an estimated free cash flow of $75 billion in fiscal 2023, Google could afford to announce a massive increase in its stock buyback. Given that the stock is still trading at a depressed valuation, this would also be a great use of company resources!

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