The hottest of the “Cloud Czars” dominating the global economy in 2021 was Alphabet (NASDAQ:GOOGL). GOOGL stock was the investment of the year. This is a call I got terribly wrong.
I don’t own Alphabet. I have worried about regulators. I accused it of being run in a Wall Street way, rather than as a Silicon Valley company.
Despite my protests, Alphabet stock is up 68% this year. What wasn’t a trillion-dollar stock in 2020 sports a $2 trillion market capitalization at the end of 2021.
The gain even beat mighty Microsoft (NASDAQ:MSFT), up 53%. Amazon (NASDAQ:AMZN), is up 25% and Apple (NASDAQ:AAPL) is up 21%, but they were left in the dust. What’s now Meta Platforms (NASDAQ:FB) is up just 10%.
But you don’t buy yesterday. You buy tomorrow. Analysts tracked by TipRanks see Alphabet managing only a Facebook-like 14% gain next year. Why?
GOOGL Stock’s Now King of All Media Names
What powered GOOGL stock in 2021 was advertising. Combined, Google search and YouTube ads represented 80% of its revenue in the third quarter, and all its net income. (Other operations, including its Google Cloud service, lost money.)
Search and YouTube operate in a symbiotic way. TV ads, on the YouTube site and the YouTube TV cable replacement service, deliver branding messages. Search ads, especially promoted results, deliver direct response. These ads can be precisely targeted, practically to the individual.
The power of this one-two punch has destroyed all other advertising media. Journalism in the 20th century meant aggregating a place, industry or lifestyle, then getting a premium price for the audience. With Alphabet, you get precise targeting for a base rate. TV is now threatened because YouTube has plenty of inventory, and search can close the sale.
Cloud Creates Secret Sauce
Advertising is how Google monetizes its cloud, but the cloud remains its secret sauce.
Alphabet puts $20 billion a year into its cloud data centers. The cash comes from operating cash flow, $25.5 billion in the third quarter alone.
It’s the cloud that makes Alphabet’s advertising and media dominance possible. The Android operating system, which takes cloud directly onto devices, means it’s not hurt by Apple’s recent privacy changes.
For analysts who worry about the sustainability of the model, Google points to revenue raises at Google Cloud. Google Cloud, however, continues to lose money, $645 million in the most recent quarter. It’s also not gaining market share. Google Cloud’s market share remains in single digits in the U.S. Amazon has a third of the market thanks to a seven-year head start.
Advertising lets Google cover up Google Cloud’s relative failure. Synergy Research estimates Google’s global share of the cloud infrastructure market is 10%. That’s with trailing 12-month revenue for the whole market at $164 billion, growing at almost 27% per year.
The growth of cloud services gives analysts confidence that Google can resist regulatory pressure on its ad operations. This is supported by Google moving to charge for more services, even cloud storage that costs it virtually nothing. A nominal monthly fee, a customer connection, also protects against regulators.
The Bottom Line
Google swallowed journalism, and all its paid content models, in the first decade of the century. It’s now swallowing traditional TV.
It’s doing all this while paying almost nothing, except for cloud capital spending. While Amazon, Apple and the rest of the media industry ramp up their content budgets, Google spends virtually nothing. Instead it brings 29% of its revenue to the net income line, and is growing by 47% per year, at scale.
Google still doesn’t offer a dividend. It only supports the stock with an aggressive buyback program.
Capital gains are what matter and, so long as the buybacks continue, capital gains seem assured.
On the date of publication, Dana Blankenhorn held long positions in AMZN, AAPL 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. Just in time for the holidays he has a collection of COVID-19 stories at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.
