In 2021, the hottest of the Cloud Czars is the one I don’t own. That would be Alphabet (NASDAQ:GOOGL,GOOG), formerly known as Google. As June opened, GOOG stock was up about 38% for the year. That’s nearly twice the rise of Facebook (NASDAQ:FB), and four times the rise in Microsoft (NASDAQ:MSFT). Amazon.Com (NASDAQ:AMZN) is basically flat and Apple (NASDAQ:AAPL) is down.
Alphabet opened June 2 at $2,435/share. That’s a market cap of $1.61 trillion and a price to earnings ratio of over 32 for a company that has yet to pay its first dividend and is growing at just 8% per year.
Why GOOG Stock?
Alphabet is hot for two reasons. One is the strength of its twin franchises, which are search and YouTube. Second is the growth potential in Google Cloud.
The franchises started the year great, with advertising revenue up by one-third to $44.6 billion in the first quarter. Google Cloud grew even faster, nearly 46%. Google also entered April with $135 billion in cash and securities on its books.
Under Thomas Kurian, who was recruited from Oracle (NASDAQ:ORCL), Google has been buying cloud market share. But that has come at a cost, a $945 million loss in cloud just in the first quarter. That’s almost as bad as its loss on “other bets,” $1.145 billion. According to Synergy Research, Google Cloud is growing faster than the market, but its share remains well behind Microsoft’s.
Microsoft, however, appears to be Google’s target. Google offers an application suite directly competitive with Microsoft Office. It has become a big player in “industry cloud,” where Cloud Wars ranks it second, behind only Salesforce.com (NYSE:CRM).
The assumption of the market seems to be that Google can make money in cloud whenever it chooses to, and that its franchises are strong enough to resist any erosion. Shares were up 14% in April, mainly on that strong earnings report.
Unmet Potential
Cloud isn’t the only area where Google has unmet potential. Waymo, its 10-year old self-driving car effort, is now barely on the industry’s radar although it had a huge initial lead. Waymo engineers now talk about the self-driving revolution taking decades.
Google lumps its hardware businesses with Google Services, meaning it’s too small or not successful enough to break out. These include Fitbit and Nest products, as well as its Pixel phones and Pixelbooks, which use the Chrome browser as an operating system. The company is only now opening its first retail store, in New York.
With malware an increasing problem Google is trying to tighten up control over Android, its mobile operating system.
GOOG Stock: The Bottom Line
The slow drift of Google has some analysts questioning its valuation. Citigroup (NYSE:C) recently downgraded the stock to neutral on concerns about ad revenue. Citi is an outlier, however. None of the 29 analysts following Google at Tipranks has it as a sell, and only two call it a hold. The price target is about 16% higher than its current price.
Growth stocks rise and fall as much on their prospects as their performance. Units that are underperforming can be seen as opportunities.
Google has a lot of these. Cloud, cars and hardware are all underperforming. Results are being held up by advertising, where it’s nearing a settlement with France but faces both public and private antitrust lawsuits in the U.S. Its lobbying budget is down, but it’s an active supporter of front groups advocating its interests.
A dividend or stock split could easily send GOOG stock into overdrive. The company seems to be floating gently above its worries. It’s that complacency that keeps me from being a buyer.
On the date of publication, Dana Blankenhorn held LONG positions in AMZN, AAPL, FB and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.
