3 Businesses That Can Take Google Stock Higher in the Near Future

Three of Alphabet’s (NASDAQ:GOOG,GOOGL) peripheral businesses look poised to boost GOOGL stock over the medium-to-longer-term.

3 Businesses That Can Take Google Stock Higher in the Near Future
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Specifically, within the next year or two, driverless cars, Google Cloud, and Fitbit (NASDAQ:FIT) should start to grow tremendously, exciting investors.

Here’s my take on why each area should meaningfully lift Alphabet stock.

Driverless Cars and GOOGL Stock

There are multiple signs that Alphabet’s driverless-car unit, Waymo, is way ahead of its competitors.

Waymo’s autonomous vehicles have already driven an impressive 20 million miles, and it has offered a ride-hailing service for the public in the Phoenix area for over a year. The company recently said that it plans to offer the service to more consumers this year, although it hasn’t been specific about the scope of the expansion. And it’s showing tremendous confidence in its autonomous technology by offering rides to the public in autonomous vehicles without anyone sitting in the driver’s seat.

None of the other companies developing autonomous vehicles, including Uber (NYSE:UBER), GM’s (NYSE:GM) Cruise, and Baidu (NASDAQ:BIDU), are offering true driverless rides to the public, much less looking to expand such a service.

Uber just started providing autonomous cars with employees sitting in the driver’s seat in Dallas in November. Cruise still isn’t offering driverless rides to the public, and Baidu only recently got a license to start testing driverless cars.

Waymo is moving forward with plans that could be easier and more lucrative than operating robotaxi services. Specifically, the company is developing self-driving trucks. Compared with providing robotaxi services, Waymo would probably have less competition in that area, and it would have to jump through fewer bureaucratic hoops, since it would not be dealing with the general public.

Further, driverless trucks would serve more of an unmet need, since trucking companies are having trouble recruiting a sufficient number of drivers, and self-driving trucks would save the sector a tremendous amount of money.

Finally, trucking companies would definitely be able to pay a large amount for self-driving trucks from Waymo. I believe that $70,000 per truck per year is a realistic estimate.

More broadly, Waymo can provide self-driving vehicles to other types of businesses, large and small. In fact, the unit already has a partnership with AutoNation (NYSE:AN) in which its autonomous cars move the auto retailer’s customers between locations and transfer auto parts from the company to repair shops.

Again, by eliminating the need to hire drivers, Waymo can save companies a great deal of money, so it should be able to charge a high price for the service.

I believe that by mid-2021, Waymo could charge businesses an average of $50,000 per year for using 50,000 of its vehicles. That computes to $2.5 billion of revenue.

If its operating margin comes in at 30%, the unit would have an operating income of $750 million. Assuming that Waymo could earn another $250 million of operating income from robotaxis, the unit would have an operating profit of $1 billion.

That should move the needle a bit for Alphabet since the company’s operating income for the 12 months ending in September was $32 billion. Additionally, the price-earnings multiple of Alphabet stock would likely rise in such a scenario as investors  become more excited about the rapid growth of Waymo.

Google Cloud and GOOGL Stock

Recently, Alphabet’s cloud business has been growing rapidly and gaining share. I think that’s largely attributable to the efforts and decisions of  Thomas Kurian, whom the company hired to head the unit in 2018.

Specifically, Kurian made “a set of key hires to bulk up its global sales muscle, made a handful of high profile acquisitions and signed a host of new partnerships to help attract more enterprise-scale customers onto its cloud platform,” Computerworld reported in September.

Kurian reported that the unit was taking more steps to explain its technology to its customers and understand their businesses.

More recently, he has pioneered “pricing tied to successful outcomes” and “industry-specific solutions,” as well as helping companies figure out ways of using Google Cloud to solve their problems. He’s also ensured that each salesperson is selling into only one industry so that he or she understands the sector and its needs very well. Finally, he’s added more security to the company’s offerings.

Kurian’s efforts are working very well. During the company’s second-quarter earnings conference call, it stated that the cloud unit’s annual revenue was on pace to reach $8 billion, up 100% from its $4 billion run rate as of the beginning of 2018.

RBC Capital analyst Mark Maheney recently wrote, “Google Cloud is likely on track to generate close to $10 billion in revenue in 2020, and at this scale, this segment is much less likely to be a margin drag on GOOGL.”

He believes that its operating margin could rise to 20%. If, at the end of 2020, the unit is on track to generate $15 billion of annual revenue with a 20% operating margin, that $3 billion of operating income, up from perhaps $600 million at the end of 2018, should have a meaningful, positive impact on GOOGL stock.

Fitbit and GOOGL Stock

I have long believed that Fitbit’s devices could become wildly popular and extremely profitable by enabling its users to quickly, easily, and cheaply identify health problems like sleep apnea, heart issues, and low glucose levels.

I also thought that FIT’s devices would be very appealing to health insurers and employers. According to my theory,  they would use the company’s devices, which are more affordable than Apple’s Apple Watch, to encourage employees to become healthier by exercising more.

Ultimately, Fitbit, which in November agreed to be acquired by GOOG, made some meaningful strides in those areas but failed to be as successful as I thought it would. Despite many years of trying, it never developed an FDA-approved sleep apnea detector, and it never unveiled a  glucose monitoring system that did not require an additional device.

It only began (sporadically) tracking blood oxygen levels this week. The company made big deals to sell Fitbits through UnitedHealth (NYSE:UNH) and the government of Singapore, but it did not sign massive contracts with other insurers or large employers.

Alphabet, of course, has a tremendous amount of money that it can use to conduct R&D,  hire a large sales team to market Fitbits to insurers and employers, and recruit health professionals to interface with the FDA. I believe that Alphabet’s resources will enable Fitbit to finally fulfill its potential, meaningfully lifting GOOG stock in the process.

Finally, 5G should be huge for Fitbit. The emerging technology’s much more accurate location sensors should enable Alphabet to serve up very effective location-based ads.

For example, advertisements for stores and restaurants could be shown to people within 1,000 feet of each venue. Stores could advertise products to people just before they walk past them. Such advertising should be quite effective for businesses and quite lucrative for Alphabet.

It also looks as if 5G will also make it easier for smartwatches to analyze health metrics. Further, the technology will allow smartwatches to control other connected devices. Those traits are likely to make smartwatches, including Fitbits, much more popular.

As Fitbits become more popular, they will generate more ad revenue for Alphabet and could enable the company to sell more hardware, including more cell phones and other connected devices.

The Bottom Line on GOOGL stock

The forward price-earnings ratio of Alphabet stock is 26.6, versus 70 for Amazon (NASDAQ:AMZN), 62 for Netflix (NASDAQ:NFLX), and 86 for Tesla (NASDAQ:TSLA). That’s largely because Alphabet is seen as a steady, relatively low-growth company.

That perception is likely to change due to the upcoming rapid growth of Waymo, Google Cloud and Fitbit. Consequently, the P/E ratio of Google stock will probably rise in the next year or two.  Given that change and the high likelihood of those businesses meaningfully raising Alphabet’s profits,  investors should buy GOOG stock now.

As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.


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