Among these positive drivers are a change to Google’s Chrome browser and an increased emphasis on cross-selling. Its other positive catalysts include the rapid growth of Google Cloud, YouTube and Waymo.
Earlier this month, Google implemented a change to its Chrome browser, which has a commanding 69% share of the overall Web browsing market. The change will prevent advertisers and other digital ad platforms from accessing trackers, known as cookies, from some websites.
As a result, Google’s competitors in the digital ad market will not have as much information about their visitors’ web browsing history. Moreover, by 2022, the company plans to prevent all cookies from being loaded onto Chrome.
The changes will make Google’s competitors less attractive to advertisers because competing websites will not have as much information for targeting consumers.
It’s unclear whether Google still has access to the entire surfing history of Chrome users. But even if it lacks such access, it will still be able to obtain a tremendous amount of data through internet search history and Gmail. That will give it a tremendous advantage over Facebook (NASDAQ:FB), its top rival in the digital ad space. Facebook doesn’t have access to much information on what its users are looking to buy without cookies.
Facebook indicated that Google’s change would have a significant affect on its ad business. Last month, its CFO, David Wehner, said that its ad revenue would only increase by 1% to about 5% year-over-year in Q1, down from 25% YOY growth in Q4.
The CFO cited “the increasing impact from global privacy regulation and other ad targeting-related headwinds” as reasons for the large deceleration. Facebook’s pain will probably be Google’s gain, as Google will likely pick up a meaningful amount of the digital ad market share that Facebook will lose.
I believe that the new CEO of Alphabet, Sundar Pichai, is putting more emphasis on cross-selling the company’s products to its customers. Meanwhile, the rapid growth of Google Cloud is giving the company more opportunities to sell its other products to large businesses.
During Alphabet’s Q4 earnings conference call, Pichai noted that giant video-game maker Activision Blizzard (NASDAQ:ATVI) had recently decided to use Google Cloud along with the company’s AI tools while also buying ads on YouTube.
I think it’s likely that Activision started out using Google Cloud, and then Alphabet successfully pitched its other products. But even if the reverse is true, it appears the company is placing increased emphasis on turning Google Cloud’s rapidly growing customer base onto its other products. That approach will boost Alphabet stock over the long-term.
Google Cloud’s performance has noticeably improved under the leadership of CEO Thomas Kurian, who took the reins in November 2018. The unit’s revenue jumped 53% year-over-year, in 2019 and in Q4, its revenue reached an annual run rate of $10 billion. In Q4, the number of its deals over $50 million more than doubled YOY.
The unit is effectively integrating AI into its offerings. As I’ve previously noted, many more businesses are starting to use AI, and that trend is likely to continue. Lufthansa (OTC:DLKAY), the U.S. Postal Service, and Wayfair (NYSE:W) are among the huge customers of Google Cloud.
Alphabet added that the unit is showing strength among small and medium businesses. Those businesses are traditionally among the most rapid-growing companies in the U.S. economy. If the unit’s annual revenue run rate rises to $16 billion, versus Alphabet’s 2019 revenue of $161 billion, its growth will really start to move the needle for the company and Google stock.
Taking advantage of cord-cutting and the rapidly increasing consumption of internet video, YouTube is also growing very quickly. Its ad revenue jumped 35% to $15.15 billion in 2019 from $11.16 billion in 2018. If, as the unit continue to benefit from these positive trends, its revenue growth accelerates to 50%, the resulting $7.5 billion increase will have a significant impact on Alphabet stock.
Finally, as I noted in my previous column on Alphabet, “there are multiple signs that Alphabet’s driverless-car unit, Waymo, is way ahead of its competitors.”
During the Q4 earnings conference call, Pichai said, “As Waymo looks to its evolution as a business, it’s focusing on strategic partnerships. For example, it’s working closely with (automakers) and other businesses to build out ride-hailing and delivery business lines.”
That statement increases my certainty that Waymo is closer than many believe to generating meaningful revenue through ridesharing and providing delivery services to businesses.
The Bottom Line on Google Stock
Finally, Waymo looks poised to start generating significant revenue for Alphabet by the end of the year. Given these points, Alphabet is likely to outperform the market going forward, making its shares worth buying.
As of this writing, Larry Ramer did not own shares of any of the aforementioned companies. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.