Alphabet (NASDAQ:GOOGL,GOOG) will soon post its Q2 earnings report. Some reports are suggesting results may not be great, but I wouldn’t sweat GOOGL stock in the long term.
Investors may find this contradictory given that the pandemic has provided Google a spike in web traffic. Additionally, there’s other potential bad news in the form of increased Government scrutiny of big tech.
CEOs from Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB), and Alphabet will testify before Congress regarding anti-competitiveness as this article is being written.
Congress seeks to understand how these companies have grown so large. And while this could have material effects on the firms in a legislational capacity, that won’t happen near-term. Frankly, the government has bigger problems in the pandemic and China. It’s unlikely to punish its homegrown tech champions no matter the outcome.
This is to imply not that they are guilty, but rather that punishing them opens the door to Chinese competition. The U.S. is of course, loath to do anything along those lines.
For investors these problems could actually be good news: there could be a dip in Google shares. And investors who buy GOOGL shares are likely to see continued growth, dip or no dip. Google will rise with Android, Chrome, Cloud, Search, and YouTube to propel shares upward.
Buy GOOGL Stock Despite Headlines
The company will remain controversial. Alphabet is subject not only to monopoly status complaints, but also to allegations it wields power to shape its political agenda.
Pundits continue to allege that Google is a tool of an ultra-leftist movement. The allegations are vast, and should proof of their legitimacy come to light, shares could suffer. Regardless, Alphabet will remain strong for years, if not decades to come.
Investors who worry about GOOGL shares’ $1,500 price should also note that fractional shares can be purchased. And although this article won’t have the benefit of Q2 earnings news, here ar some metrics investors should consider regarding GOOGL shares.
Display Ads Are Alphabet’s Lifeblood
In 2019 Alphabet generated 83% of revenues from display ads online. In Q1 2019, the figure was a near-identical 82%.
Alphabet comprises many businesses, but the important thing to note is that ad revenue finances most of it. So, while Alphabet projects including Waymo and Verily are doing interesting work, they aren’t creating much inherent value for GOOGL shares.
Of course, autonomous vehicles and life extension science may provide handsome returns in the future. And perhaps Google will see these businesses supplant ad revenue in terms of company-wide importance someday. In any case, these so-called ‘Other Bets’ do make shares that much more interesting. But for now, as ad revenue goes, so goes Alphabet shares.
In Q1 2020, Google generated $40.975 billion in revenue. Meanwhile, ‘Other Bets’ which includes Waymo, Verily, and several other projects generated $135 million.
Nevertheless, they have great potential and current shareholders certainly hope they can create significant future revenues. The point here is that investors should look at where Google’s revenue comes from currently, and where it may come from in the future.
Google Cloud Platform
GOOGL investors should be pay keen attention to Google Cloud. It is driving a significant portion of revenue and will have a larger impact than some flashier projects for the near-term at least. In Q1 2019, Cloud contributed 5.1% of Google revenues and rose to 6.8% Q1 2020. Investors might look at that figure and scoff. Yet, the absolute change was 52.16%, rising from $1.825 billion to $2.777 billion. Google’s cloud computing capability has the potential to really drive revenue going forward.
The last thing investors in GOOGL should keenly observe is TAC. TAC stands for traffic acquisition costs and given the company’s reliance on ad revenue, is vitally important. From Q1 2019 to Q1 2020 this cost remained steady at 19% and 18.2% relative to revenue, respectively.
A Final Verdict
Investors should strongly consider purchasing Alphabet shares. Yes, they are expensive. Yet, investors can also purchase fractional shares.
Alphabet doesn’t have competitors which can supplant it any time on the forseeable horizon. The company makes money efficiently and has an ecosystem of businesses that could themselves, become giants. Get in now, keep an eye on some of those metrics above, and don’t be scared by anti-Google headlines.
As of this writing, Alex Sirois did not own shares in any of the above mentioned stocks.
