Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) shares have been in an uptrend in the last one year. During this period, Google stock has trended higher by 35%. It currently has a market capitalization of $1.04 trillion.
Like any other equity, Google stock is likely to see periods of correction and consolidation. However, I believe that it will remain in an uptrend.
There have been opinions that the technology sector is overvalued with a potential bubble. But I am not subscribing to this view. If we look at Google stock, it’s currently trading at a price-earnings ratio of 27.86. With an expected earnings growth rate of 16.40% over the next five years, the stock does not seem pricey.
In addition, Alphabet has diversified growth opportunities with financial muscles to pursue organic and inorganic growth. As of December 2019, the company reported cash and equivalents of $119.7 billion. Further, Alphabet reported free cash flow of $31 billion for the same period. There will be further clarity on financial flexibility when I discuss the company’s growth strategy.
Ample Growth Scope for Google Health
Alphabet is a big entity and it’s not possible to discuss every aspect of a business in a single column. I therefore wanted to stress emerging growth opportunities than talk about established business segments.
One such growth opportunity comes from the Google Health division, which now has more than 500 employees. Alphabet intends to use artificial intelligence to “reinvent” the $3 trillion healthcare industry in the United States.
Sundar Pichai, CEO of Alphabet, recently commented that “health care offers the biggest potential over the next five to 10 years for using artificial intelligence to improve outcomes.” The CEO also “vowed” that Alphabet will keep privacy issues as a top priority.
Sundar Pichai seems bullish and there are reasons. It is estimated that the healthcare AI market was valued at $1.3 billion in 2018. The industry is expected to grow at a CAGR of 41.7% between 2019 and 2025.
It is worth noting that even Nvidia (NASDAQ:NVDA) is using AI to provide imaging and genomics services to the healthcare industry. So, there will be increasing competition, but Alphabet is among the early movers.
While the acquisition of Fitbit (NYSE:FIT) is pending regulatory approval, it’s also a part of the broader push into the healthcare industry. The company’s Verily Study Watch has already been cleared by the FDA to detect irregular heart rhythms.
The company’s financial muscles become relevant here as Alphabet is focused on acquiring innovators. In the coming years, acquisitions will help in accelerating growth.
Google Cloud Services Likely to Expand
In terms of market share, Google is behind Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Alibaba (NYSE:BABA) in the cloud services business.
However, the global market remains under-penetrated and Google is likely to make inroads into cloud services. My conviction is backed by the company’s recent acquisition of Looker for a consideration of $2.6 billion.
The big data analytics firm’s acquisition should help Google, which has already been buoyed by the success of success of Google Cloud’s BigQuery.
Google cloud for healthcare and life sciences is also likely to accelerate growth. The cloud segment already has customers, which include McKesson (NYSE:MCK), National Institutes of Health and Athena Breast Health Network, among others.
It is worth noting here that Google Cloud reported revenue of $4 billion in 2017, $5.8 billion in 2018 and $8.9 billion in 2019. Clearly, the growth rate has witnessed acceleration. Organic and inorganic growth will continue to deliver strong results for the segment.
My Concluding Thoughts on Google Stock
Google stock has been in an uptrend and there are fundamental reasons backing the rally. The stock is certainly not overvalued, and any correction is an opportunity for fresh exposure.
Besides a healthy core business, Alphabet is likely to register sustained growth with a focus on healthcare and cloud services. An aggressive inorganic growth approach is also likely to help in acquiring innovators and staying ahead of the curve.
Overall, I remain positive on Google stock with a medium- to long-term time horizon.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
