Alphabet, the parent company of Google, is one of the largest technology businesses in the world. If you had invested $1,000 in the company's IPO back then, your investment would be worth about $63,500 today.
That's great news for early investors, but those who don't already own Alphabet may wonder if it's too late to buy stock in this FAANG company. Today we'll look at a few convincing judgments to buy Alphabet, as well as one reason to sell it, to see if it's still a good long-term investment.
First, the company is a powerful energy in online advertising.
Alphabet's expansive ecosystem includes the world's most popular search engine, a mobile operating system (Android), a streaming video site (YouTube), a Web browser (Chrome), and an e-mail platform (Gmail).
All of these platforms support Google's core advertising business, which sells search, display, and video ads on all of its platforms. According to eMarketer, Google is likely to account for 28.6 percent of all digital ad spending worldwide this year, putting it in the first place, ahead of Facebook's 25.2 percent.
All of Google's smaller competitors and Facebook - such as Alibaba, Amazon, and Tencent Holdings - still hold single-digit shares of the digital advertising market. So any business looking to advertise online is likely to visit Google and Facebook before considering other platforms.
Last year, Alphabet's ad revenue from Google grew 9% to $146.9 billion, or 80% of the company's total revenue, even though the pandemic caused businesses to buy fewer ads. In the first half of 2021, Google's ad revenue grew 50% year over year to $95.1 billion as the negative factors associated with the pandemic subsided.
Second is the growth of Google Cloud.
Google's advertising business slowed temporarily in 2020, but Google Cloud revenue grew 46% to $13.1 billion as cloud usage accelerated during the pandemic. In the first half of 2021, segment revenues grew another 50% year over year to $8.7 billion.
Google Cloud is not yet profitable, according to Canalys, and it still ranks a distant third in the cloud infrastructure market behind Amazon Web Services (AWS) and Microsoft Azure.
But Google Cloud continues to expand and win over an expanding listing of major partners, including Target, Home Depot, Twitter, and PayPal. Many of these customers probably don't want to support Amazon's most profitable business (as they compete with its retail business) or tie themselves to other Microsoft enterprise services.
Google Cloud's profitability should expand as it improves, but until then it can subsidize its growth with its more profitable advertising business. According to Research and Markets, the global cloud computing market will grow at a compound annual growth rate (CAGR) of 19.1 percent from 2021 to 2028, so Google's cloud business could grow faster than its core advertising business for the foreseeable future.
Third, it's a reasonable valuation of the company.
Analysts expect Alphabet's revenues and profits to grow 37% and 72%, respectively, this year, amid an easy comparison to the impact of the pandemic on the advertising business. Next year, they expect revenues and profits to grow 17% and 5%, respectively, as comparisons with last year normalize.
Based on these expectations, Alphabet is trading at 26 times earnings guidance and 7 times sales guidance, making it more reasonably valued than many of the more "bloated" growth stocks in the tech sector.
But there is still one cause for concern: antitrust risks.
Alphabet's core businesses look strong, but a series of antitrust battles could undermine its growth.
Last October, the U.S. Department of Justice filed an antitrust suit against Google for allegedly monopolizing the online search and search-based advertising market, and is reportedly preparing to file a second antitrust suit to address Google's dominance in certain advertising technologies. Two separate coalitions of states have also filed their lawsuits against Google over its search and advertising business.
The European Commission previously investigated Google Shopping, Google AdSense, and Android, after which it accused Google of using these platforms to drive competitors out of their respective markets. These antitrust investigations led to three separate fines totaling more than $8 billion and forced Google to stop bundling its third-party apps with new Android devices in Europe. If the DOJ case follows a similar path, Google could face even more fines and demands to unbundle its ecosystem.
Google also bears additional antitrust encounters in Australia, India, and South Korea, and more countries may join the process. All of these pressures could prevent investors from paying a higher premium for Alphabet stock.
Alphabet's antitrust problems can't be ignored, but they don't negate its strengths just yet. Alphabet will likely continue to grow, even if fines and new restrictions get in its way.
In a worst-case scenario, Alphabet could be split into several smaller companies. Nevertheless, Alphabet investors would likely get new shares of these smaller companies that could continue to grow on their own without being tied to Google's sprawling ecosystem.
That's great news for early investors, but those who don't already own Alphabet may wonder if it's too late to buy stock in this FAANG company. Today we'll look at a few convincing judgments to buy Alphabet, as well as one reason to sell it, to see if it's still a good long-term investment.
First, the company is a powerful energy in online advertising.
Alphabet's expansive ecosystem includes the world's most popular search engine, a mobile operating system (Android), a streaming video site (YouTube), a Web browser (Chrome), and an e-mail platform (Gmail).
All of these platforms support Google's core advertising business, which sells search, display, and video ads on all of its platforms. According to eMarketer, Google is likely to account for 28.6 percent of all digital ad spending worldwide this year, putting it in the first place, ahead of Facebook's 25.2 percent.
All of Google's smaller competitors and Facebook - such as Alibaba, Amazon, and Tencent Holdings - still hold single-digit shares of the digital advertising market. So any business looking to advertise online is likely to visit Google and Facebook before considering other platforms.
Last year, Alphabet's ad revenue from Google grew 9% to $146.9 billion, or 80% of the company's total revenue, even though the pandemic caused businesses to buy fewer ads. In the first half of 2021, Google's ad revenue grew 50% year over year to $95.1 billion as the negative factors associated with the pandemic subsided.
Second is the growth of Google Cloud.
Google's advertising business slowed temporarily in 2020, but Google Cloud revenue grew 46% to $13.1 billion as cloud usage accelerated during the pandemic. In the first half of 2021, segment revenues grew another 50% year over year to $8.7 billion.
Google Cloud is not yet profitable, according to Canalys, and it still ranks a distant third in the cloud infrastructure market behind Amazon Web Services (AWS) and Microsoft Azure.
But Google Cloud continues to expand and win over an expanding listing of major partners, including Target, Home Depot, Twitter, and PayPal. Many of these customers probably don't want to support Amazon's most profitable business (as they compete with its retail business) or tie themselves to other Microsoft enterprise services.
Google Cloud's profitability should expand as it improves, but until then it can subsidize its growth with its more profitable advertising business. According to Research and Markets, the global cloud computing market will grow at a compound annual growth rate (CAGR) of 19.1 percent from 2021 to 2028, so Google's cloud business could grow faster than its core advertising business for the foreseeable future.
Third, it's a reasonable valuation of the company.
Analysts expect Alphabet's revenues and profits to grow 37% and 72%, respectively, this year, amid an easy comparison to the impact of the pandemic on the advertising business. Next year, they expect revenues and profits to grow 17% and 5%, respectively, as comparisons with last year normalize.
Based on these expectations, Alphabet is trading at 26 times earnings guidance and 7 times sales guidance, making it more reasonably valued than many of the more "bloated" growth stocks in the tech sector.
But there is still one cause for concern: antitrust risks.
Alphabet's core businesses look strong, but a series of antitrust battles could undermine its growth.
Last October, the U.S. Department of Justice filed an antitrust suit against Google for allegedly monopolizing the online search and search-based advertising market, and is reportedly preparing to file a second antitrust suit to address Google's dominance in certain advertising technologies. Two separate coalitions of states have also filed their lawsuits against Google over its search and advertising business.
The European Commission previously investigated Google Shopping, Google AdSense, and Android, after which it accused Google of using these platforms to drive competitors out of their respective markets. These antitrust investigations led to three separate fines totaling more than $8 billion and forced Google to stop bundling its third-party apps with new Android devices in Europe. If the DOJ case follows a similar path, Google could face even more fines and demands to unbundle its ecosystem.
Google also bears additional antitrust encounters in Australia, India, and South Korea, and more countries may join the process. All of these pressures could prevent investors from paying a higher premium for Alphabet stock.
Alphabet's antitrust problems can't be ignored, but they don't negate its strengths just yet. Alphabet will likely continue to grow, even if fines and new restrictions get in its way.
In a worst-case scenario, Alphabet could be split into several smaller companies. Nevertheless, Alphabet investors would likely get new shares of these smaller companies that could continue to grow on their own without being tied to Google's sprawling ecosystem.
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✅ TELEGRAM CHANNEL: t.me/+VECQWxY0YXKRXLod
🔥 UP to 4000$ BONUS: forexn1.com/broker/
🔥 ZERO SPREAD BROKER: forexn1.com/usa/
🟪 Instagram: instagram.com/forexn1_com/
🔥 UP to 4000$ BONUS: forexn1.com/broker/
🔥 ZERO SPREAD BROKER: forexn1.com/usa/
🟪 Instagram: instagram.com/forexn1_com/
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.