After treading water over the last month, the stock of Google parent company Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) looks ready to breakout above $3,000.00 per share. GOOG stock opened at $2,982 on Dec. 10, while GOOGL stock opened at $2,974 — my analysis will focus on GOOG, but the two stocks are very similar.
That’s an increase of 69% since the start of the year. The year-to-date increase makes Alphabet the best performing of the large cap tech stocks known as “FAANG.”
Since the start of November, the shares have been bouncing up against their all-time high of $3,037 but have not been able to hold above the $3,000 level. However, with a number of corporate and economic tailwinds behind it, GOOG stock looks poised to test new highs and provide even more value to shareholders.
GOOG Stock in the $2 Trillion Club
Alphabet’s market capitalization surpassed $2 trillion on Nov. 8, putting it in exclusive company alongside Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) as the only publicly traded companies to achieve such a large valuation. GOOG stock crossing the $2 trillion mark is even more impressive when one considers that the company’s market capitalization reached $1 trillion for the first time in January 2020. Alphabet’s market cap has doubled in less than two years.
That impressive feat has been fueled by a strong rebound in online advertising that has benefitted the Google search engine, as well as Alphabet’s success with its other ventures that include everything from cloud computing to the YouTube video streaming site.
In this year’s third quarter, Alphabet generated $65 billion in revenue, which was a 41% gain from a year earlier. Online advertising led the way with $53.1 billion of revenue, followed by the company’s “other segment” that generated $6.8 billion of revenue and Google Cloud that contributed $5 billion.
Through three quarters of the year, YouTube generated $20.2 billion in online ad revenue compared to $12.9 billion in the first nine months of 2020, representing 57% year-over-year growth. YouTube’s ad revenue so far this year rivals the $22 billion that streaming giant Netflix (NASDAQ:NFLX) earned from its monthly subscriptions in the same time frame.
Cloud Computing
Clearly, Alphabet is the leader when it comes to online advertising. However, the company is pushing into new areas where it is starting to dominate, notably in cloud computing. Google Cloud currently accounts for less than 10% of Alphabet’s revenue, and the unit is not yet profitable. However, Google Cloud has been making some big inroads in the highly competitive space that is dominated by Amazon’s (NASDAQ:AMZN) Amazon Web Services and Microsoft Azure. Amazon controls 32% of the cloud computing market today, while Microsoft controls 19%. Google Cloud is in third place with a 7% market share and growing.
With the compound annual growth rate (CAGR) of cloud computing expected to grow at 16.3% through 2026, there is plenty of runway ahead for Google Cloud to continue its aggressive expansion.
And Alphabet remains a cash machine owing to its lucrative online advertising business. The Mountain View, California-based company currently has more than $140 billion of cash on hand next to only $14 billion of long-term debt. Alphabet can deploy plenty of cash towards the future growth of its cloud computing business, making it even more competitive and global in its reach.
Buy GOOG Stock for Its Upside
Alphabet is a leading technology company that is becoming more dominant in the markets in which it competes. And while the company’s stock has enjoyed strong gains this year, analysts see more upside ahead. The median price target on the shares is $3,350, suggesting another 13% gain in the coming year. Also beneficial is the fact that Alphabet’s stock trades at 24 times earnings, making it cheaper than both Amazon and Microsoft. And the shares trade at a reasonable forward price-to-earnings ratio of 26.3, which is attractive given the company’s growth trajectory. Anyway you look at it, Alphabet continues to be a top shelf company. GOOG stock is a buy.
On the date of publication, Joel Baglole held long positions in GOOG and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.
