In the investment world, it’s easy to get caught up in the day-to-day noise. But, a lot of that day-to-day noise amounts to nothing more than irrelevant distractions that do not materially impact the big picture. As such, when investing, it’s often best to take a step back, and see the forest through the trees.
Specifically, this company has been, still is, and projects to remain, the backbone of the world’s most used and valuable private good — the internet.
As the backbone of the internet, Alphabet is at the epicenter of the secular growth digital ad market. This will keep growing at a healthy pace over the next several years, and Alphabet will remain the dominant player. At the same time, Alphabet has multiple tangential growth drivers — data-centers, self-driving, smart home, cloud gaming, etc. — which will help support robust revenue and profit growth for a long time.
As revenues and profits trend higher in the long run, so will GOOGL stock.
Consequently, I remain bullish on Alphabet stock for the long haul. The fundamentals are simply too good to pass up on, and the valuation leaves plenty of room for big upside over the next few years.
Long-Term Outlook Is Favorable
The first part of the long-term bull thesis on Alphabet stock is that this company’s long-term fundamentals and growth prospects are highly favorable.
Although history is not a clear indicator of the future, it is nonetheless important to see what Alphabet has done over the past decade and to see where the company may go over the next decade. Consider the following:
- Alphabet’s revenues have risen at a 20% compounded annual growth rate over the past decade, faster than the global digital ad market’s ~16% growth rate during that same stretch (from 2008 to 2018).
- Alphabet’s operating profits have risen at a 17% compounded annual growth rate over the past decade, inclusive of 2018’s depressed margins.
- GOOGL stock is up more than 400% over the past decade.
That’s an impressive track record of consistent and robust revenue, profit, and share price growth for Alphabet. It lays the groundwork for continued success over the next several years.
The digital ad market projects to keep growing for the foreseeable future, as global consumption continues to pivot into the digital channel. Despite rising competition, Alphabet projects to remain the global leader in that market, mostly because YouTube and Google Search are irreplaceable titans in the digital ecosystem.
Beyond the digital ad business, Alphabet’s cloud business will continue on its rapid growth trajectory as a continued surge in data volume globally will translate into increased data-center usage. The hardware business will gain traction with new products like Google Stadia. The self-driving Waymo business will start to produce meaningful revenue once self-driving taxi services become a real thing.
The long term outlook supporting GOOGL stock remains broadly robust.
Alphabet Stock Valuation Leaves Room For Upside
The second part of the long-term bull thesis on Alphabet stock is that the current valuation leaves plenty of room for upside over the next several years.
The global digital ad market is projected to slow over the next few years. But, into 2025, it is projected to grow at a 10%-plus annualized pace. Alphabet’s ad growth rates will likely be slower, as the company cedes market share to up-and-coming digital ad companies like Snap (NYSE:SNAP) and Pinterest (NYSE:PINS). But, that lagging ad growth rate will be more than offset by 20%-plus growth rates from the cloud, hardware, and self-driving businesses.
Assuming roughly 10% growth out of the ad business and roughly 20% growth out of everything else, Alphabet should be able to grow revenues at a 10%-15% rate over the next several years. Margins — which are already stabilizing after several years of compression at the hands of a shift to lower-margin mobile advertising — should move higher as the company’s up-and-coming businesses gain sufficient scale to drive meaningful operating leverage.
Alphabet very realistically projects as a double-digit revenue grower over the next several years with sizable margin drivers. That paves a visible runway for EPS to eclipse $100 by 2025. Based on a historically average 20-times forward multiple, that implies a 2024 price target of $2,000-plus for Alphabet stock.
Alphabet stock trades hands below $1,200 today. Thus, over the next few years, Alphabet stock has fundamentally supported visibility to nearly 70% gains.
Bottom Line on GOOGL Stock
When it comes GOOGL stock, the best thing to do is take a step back and see the forest through the trees. When you do that, it becomes clear that all this digital ad regulation, big tech break-up, compressing margins, and slowing growth noise is just … well, noise.
In the big picture, Alphabet is the backbone of the internet, at the epicenter of a secular growth digital ad market, and supported by multiple tangential growth drivers in cloud, hardware, and self-driving. That big picture translates into one simple fact: revenues and profits will move meaningfully higher over the next five years.
So will GOOGL stock.
As of this writing, Luke Lango was long GOOG.