The pandemic curtailed ad revenue for major tech companies but Google (NASDAQ:GOOG, NASDAQ:GOOGL) continues to remain a strong investment despite the Covid-19 headwinds. At its current price, Google stock is a strong post-pandemic play.
As of November 2020, the company controls 92.26% of the internet search market. This monopoly-like share puts the tech giant in a great position to benefit from the recovery of ad revenue.
Although Google and its tech-peer, Facebook (NASDAQ:FB), are facing a number of legal battles right now, it will not impact their growth in the near future.
Google Stock Will Score Major Ad Bucks
During the economic downturn of 2020, several companies slashed their ad budgets in an effort to cut costs. This invariably impacted Google, which relies on ad revenue as a major source of income. With a majority share of the search engine market, the company holds immense ad pricing power over its competitors.
But like many sectors, ad revenue was not immune to the effects of the pandemic. Google’s reported revenue in this sector dipped from $33.8 billion in Q1 to $29.9 billion in Q2. Although it did see an uptick in this value in Q3.
However, looking toward the second half of 2021 – also known as the vaccine recovery phase – Google is expected to report stronger ad revenue results. This is due to two main reasons. One, as mentioned earlier, Google holds a majority share of the online search engine market. This means that when ad revenue picks up, Google will be among the first companies to see some gains. Second, Google earns its ad bucks from a diverse pool of advertisers. Travel companies make up 10% while local businesses make up 30%. A revival of these sectors will result also means more spending on advertising.
Analyst Heath Terry at Goldman Sachs believes that Google will see double-digit growth in 2021 and gave the stock a target price of $2,250. The stay-at-home economy coupled with ad revenue from economic recovery will serve as major upsides for the tech company. Although Google and its tech-peer, Facebook face regulatory scrutiny, the fundamentals of the business remain strong.
The Golden Age of the Cloud
The work from home environment made cloud infrastructure stocks a major pandemic play in 2020. This rally is expected to carry on to 2021 as well. Although some companies will eventually return to physical workspaces, the pandemic highlighted the importance of having an online presence. In addition to this, companies like Facebook and Twitter (NYSE:TWTR) are making WFH a permanent option. In other words, the cloud’s winning streak is not ending anytime soon.
Google is not a major player in this sector with revenue from the Google Cloud Platform (GCP) making up just 7.5% of its total revenue in Q3. However, this also means the company’s cloud infrastructure has a huge runway for growth. By the numbers, the cloud platform generates a higher margin than its ad revenue. An upward growth trajectory of this platform in 2021 will have a significant impact on Google’s bottom line.
In its previous quarter, GCP grew 45% at $3.44 billion. In comparison, Amazon’s cloud platform, Amazon Web Services (AWS) grew by just 29%. Amazon is the clear market leader in the sector but Google’s potential for growth makes the stock a strong buy in 2021.
With a greater focus on its cloud platform in the coming years, Google’s CEO Sundar Pichai announced that GCP will operate as an independent segment from the fourth quarter.
The Bottom Line
Google stock dipped in 2020 but I strongly believe there are brighter days ahead for the company. With a dominant position in the advertising space, Google’s ad revenue will benefit from the return to normal. “Googling” information on travel and local activities will reignite this revenue.
Adding to this is the growth potential of its cloud platform. GCP is still lagging behind competitors in the space but this will change in 2021 as the company invests and develops its infrastructure.
Finally, these growth catalysts are also cushioned by Google’s strong cash position. The company holds $132.6 billion in cash as of Q3, which will see it through the next few months. In my opinion, Google stock is a strong vaccine recovery play and is headed for some big gains this year.
On the date of publication, Divya Premkumar did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020.
