Here are five factors making Alphabet an attractive investment now, just weeks before its upcoming 20-for-1 split in July.
- A Near Monopoly In High-Growth Search
Alphabet may have created one of the greatest businesses ever with Google Search Engine. Over two decades ago, Google quickly established itself as the dominant search engine on earth; as more individuals use Search, the more it scales, collects data, and invests back into its algorithms to improve it further – creating an virtuous cycle which draws more individuals in – all leading up to phenomenally profitable, capital-light business operations with global reach.
Though some might perceive Google Search to be an established business, search ads experienced remarkable 43% growth last year despite returning from pandemic activity. According to Zenith Media estimates of 25% digital ad market growth. Google had its biggest year yet; Zenith estimated an incredible increase of up to 97% from digital ad markets this past year!
Google could expand their digital ad market once again this year and beyond, given changes to iOS in 2021 which makes targeting harder. As a result, more ads migrated over to Google starting late last year as people unconsciously shared information about what they searched for on search engines like Google.
And Google’s YouTube business also reaps the benefits of voluntary searching, which has seen strong growth at the smaller video-ad segment. Overall, Alphabet’s digital ad landscape across Search, YouTube and outsider organization partners remains as robust as ever.
- Google Cloud
Google Cloud mes One potential alternative to search advertising may be enterprise cloud infrastructure, which is currently dominated by only a handful of tech giants who possess both financial and technical resources to offer secure enterprise cloud services globally outside China.
With such an attractive oligopoly structure in place, cloud infrastructure market holds some of the brightest growth prospects of all markets. Research firm IDC forecasts 28.8% compound annualized growth through 2025 for infrastructure and platform-as-a-service businesses.
Alphabet ranks third behind Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT), consolidating market share faster. Google Cloud Platform’s market share reached 47% by 2021 – outstripping all industry competitors.
Google Cloud entered the distributed computing market late, so its losses are still substantial. That being said, its growth strategy has proven very effective; operating losses narrowed considerably year over year from $5.6 billion in 2020 to just under $3 billion last year; of its incremental income of $6.1 billion generated last year, roughly 41% went directly into bottom line profits – meaning Google Cloud may become entirely profitable soon just like earlier entrants into this space.
- Different Bets, Groundbreaking Research, Acquisitions
Alphabet may have begun slowly in distributed computing, yet many businesses still choose Google Cloud due to its innovative tools and platforms. Alphabet has made considerable investments in artificial intelligence across its platform – from Search and Cloud Search through to Other Bets segment; including self-driving cars, life science data-driven innovation projects and quantum computing projects.
Alphabet has also shown itself willing to make acquisitions for key technologies, most recently purchasing health tracking company Fitbit for $1 billion and cybersecurity firm Mandiant for $5.4 billion (among many other deals).
- Alphabet Is Also Returning More Cash To Shareholders
Alphabet was often accused of overspending on R&D, leading to criticism that its financial commitments to it made for “loose spending.” In 2015 however, Sundar Pichai took over from Larry Page as CEO and Ruth Porat (former CFO of Morgan Stanley) was appointed Alphabet’s CFO.
Alphabet demonstrated greater financial discipline and was eager to return profits through stock buybacks to shareholders, decreasing its share count since 2018 while expanding shareholders’ stake in its business:
Alphabet generates so much profit that its cash balance remains healthy at around $140 billion as of the end of 2021, providing investors with all they need for growth in its core ad businesses. Shareholders can enjoy having it their way.
- A Cheap Valuation
Either due to its high share price or due to misunderstandings of its various parts, Alphabet seems undervalued at present; trading at less than 25 times this year’s earnings estimates seems like a reasonable valuation for a company which increased income 41% while operating earnings increased 91% year over year in 2021.
Keep in mind, however, that Alphabet’s earnings are currently held back by losses at Google Cloud and Other Bets. Last year alone, these losses totaled $8.4 billion – cutting Alphabet’s operating income by almost 10% compared to 2016. If you believe Cloud and Other Bets has any value beyond loss-making operations then buying these assets would amount to purchasing an even lower multiple ads business than before.
Alphabet appears incredibly cheap when compared with loss-making software stocks with similar growth potential, so investors shouldn’t hesitate to invest before its July split.