Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) saw its market capitalization pass the $2 trillion mark in November. GOOG stock has since slipped, dropping the market cap to $1.89 trillion (more on that in a moment).
Alphabet is a multifaceted company. However, the reason for its phenomenal growth lies with just one business: advertising. 23 years after the founding of Google, ad sales through Google Search and YouTube still account for about 80% of Alphabet’s revenue.
So where’s the next trillion dollars on the market cap going to come from? According to Alphabet’s CEO, the future looks a lot like the past.
The company says search ad sales will continue to drive growth for the foreseeable future. If that assumption sounds boring, or even risky, Alphabet sees AI — one of its big bets over the past decade — helping to keep the momentum going.
It’s time for a deeper dive on these topics, because if Alphabet hits the $3 trillion market cap level, GOOG shares at current prices (especially during the current dip) are going to seem like the deal of the century.
Google Search: Powered by Ad Revenue
Google Search is what started this company and it’s still the engine that drives Alphabet. In the company’s latest quarter, Google Search alone accounted for $37.9 billion in revenue. Throw in advertising revenue from YouTube and other Google services and the number climbs to $53.1 billion. With total company revenue for the quarter hitting $65.1 billion, that means advertising accounted for about 81.5% of Alphabet’s revenue. The majority of that was through search ads.
It was just weeks after that Q3 earnings report that Alphabet topped a $2 trillion valuation for the first time. To get there, GOOG stock had nearly doubled in value since the start of 2020.
In a Bloomberg interview shortly after GOOG stock hit that milestone, Alphabet CEO Sundar Pichai had this to say about where the next trillion dollars in growth would come from:
“Consumers will ask computers more questions with voice and ‘multimodal experiences.’ Being able to adapt to all that and evolve search will continue to be the biggest opportunity.”
Artificial Intelligence
Pichai also pointed to the company’s investment in AI as an important factor. While Alphabet’s DeepMind AI lab was reported to have delivered a small profit in 2020 (after losing $649 million in 2019), you won’t find AI spiked out in Alphabet earnings.
Instead, different aspects of AII are folded into divisions like Google Cloud and Other Bets. In the Bloomberg interview, Pichai noted that AI investments are “underlying” the company’s key growth businesses. In other words, a big part of the equation for Google Search evolving to remain the go-to search engine and commanding top ad rates is the use of AI.
Alphabet Faces Challenges Ahead
Plug GOOG stock into my Portfolio Grader and you’ll see a “B” rating. It’s a good growth pick, but not perfect. The case for the ongoing domination of Alphabet (and ongoing growth of GOOG stock) may sound like a slam dunk, but it’s not quite that easy. Potential investors need to be aware that the company does face challenges.
One of the biggest threats is actually a direct result of its success. The domination of Google in areas like internet search and smartphones (through its Android operating system) has resulted in an ongoing series of regulatory investigations across multiple continents. These have already seen the company hit with $9.5 billion in fines over the past decade from the European Union alone. There have also been calls to break up Google as part of a crack down on anti-competitive practices in big tech.
Another threat to be aware of is the slow shift of search from a specialized search site, to within ecommerce sites. In other words, instead of “Googling” a product, some consumers are going to their favorite online retailer and searching within that site instead. Doing so gives advertising dollars to the retailer instead of paying for an ad to appear on a Google Search result.
Bottom Line on GOOG Stock
Despite the challenges, the long-term growth prospects for GOOG are good. Making 80% of its revenue from selling ads may sound boring for a tech company, but Alphabet has been incredibly successful by doing just that. That’s where it sees the value coming from to hit a $3 trillion market cap.
Rather than sitting still and waiting for advertisers to throw money at it, Alphabet has been spending the money to build its AI capability, making Google Search and other services smarter. That will keep them as the top choice for consumers and advertisers.
With GOOG stock off its November high close by 5%, now is a good time to make a move if you want to add this tech giant to your portfolio.
On the date of publication, Louis Navellier had a long position in GOOG. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
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