Investors in Alphabet (NASDAQ:GOOG, GOOGL) stock really have a gem on their hands. For those who don’t own this mega-cap name, either directly or through an ETF, I don’t know what to say. Perhaps, “you’re missing out” would suffice.
Alphabet is the parent company of Google, and has interests in a wide range of growth industries. However, the vast majority of the company’s overall revenues are still derived from Google’s search/advertising business.
Therefore, I’m going to be focusing most of my attention in this article on Google, the company’s core business.
Indeed, Alphabet has been one of those steady growth stocks that contributes a significant percentage of the market’s overall growth each and every year. It’s a play on the digital future and is still priced reasonably well despite having nearly doubled from last year’s March lows.
Let’s dive into why investors should still get excited about GOOG stock today.
Advertising Growth and GOOG Stock
Looking at Alphabet’s financial results, investors will notice some pretty decent overall growth. At the onset of the pandemic, investors became overly bearish about the company’s growth prospects. In fact, initial predictions were that advertising revenue would drop 5.3% in 2020.
In actuality, the story was quite different this past year, and it was reflected in the company’s stock price.
Google Search revenue grew by 6.1% and Youtube ad revenue increased by 30.5% led the charge on the top line. Indeed, the company churned out $182.5 billion in overall revenue last year vs. $161.9 billion the year prior. That’s good for 12.7% year-over-year growth.
So much for those projections.
As expected, Google advertising revenue accounted for a massive 80.5% of the company’s overall revenue. That said, this percentage has actually been on the decline of late. Here’s why.
Alphabet Is Much More than Just Google
The company reports its results in three segments: Google services, Google cloud, and “other bets.”
Google cloud has been an outperforming segment for Alphabet in recent years. The company’s 46.4% growth rate year-over-year in its cloud business deserves a second look by investors.
Indeed, investors are hopeful that continued growth in cloud computing and Google’s aggressive strategies to target market share growth will result in continued outperformance over the long term.
CEO Sundar Pichai highlighted this in his comments to shareholders in the release.
“Our strong results this quarter reflect the helpfulness of our products and services to people and businesses, as well as the accelerating transition to online services and the cloud,” he said.
Additionally, investors shouldn’t dismiss the company’s “other bets” segment. While relatively inconsequential in size (“only” accounting for $657 million of the $$182.5 billion in revenue the company generated), there’s a heck of a lot of growth potential in this category.
Year-over-year growth was flat for the company’s assortment of smaller VC-like acquisitions. However, there are a few key investments the company has made that are worth looking at.
Among these: Waymo.
Investors may note that Waymo has just raised $2.3 billion via an external investment as investors grow bullish on the autonomous vehicle company’s growth prospects. Indeed, this is a key potential growth segment that could help juice the company’s overall growth long-term, and shouldn’t be ignored.
GOOG Stock Attractively Valued
Alphabet’s valuation certainly isn’t cheap, but it’s not outrageous. In fact, of the FAANGM stocks, I think Alphabet, Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB) are really the three “value” names in the bunch that fundamentals-focused investors could make a value (or at least a growth-at-a-reasonable-price) argument for.
Right now, investors in GOOG stock are paying less than 30-times forward earnings and around 6-times forward sales. That’s really not out of line with the company’s historical levels and is cheaper than most of its mega-cap peers.
When looking at mega-cap stocks like Alphabet, the long-term growth rate of these companies really matters. In valuation terms, that’s going to be the core driver of any investor’s model when thinking about what these companies are worth.
In the case of Alphabet, and more specifically Google, these growth projections can vary significantly from investor to investor.
During the depths of the pandemic, concerns about online advertising demand taking a hit from stretched corporate budgets played into a very bearish thesis for GOOG stock.
However, of course, the transition away from traditional brick-and-mortar retail to e-commerce actually led to a surge in online advertising demand. Growth has not really ever escaped Google. However, it’s really the rate of growth investors are interested in right now.
There’s some concern that growth in online advertising revenues could peel off at some point.
Disclosure: On the date of publication, Chris MacDonald held a LONG position in NASDAQ:GOOG.