Propelled by Multiple Trends, Alphabet Stock Should Rally

Alphabet’s (NASDAQ:GOOG,NASDAQ:GOOGL) fourth-quarter (Q4) results showed that the company’s advertising and cloud businesses are quite healthy and growing very rapidly. Those trends should continue for the foreseeable future, pushing GOOG stock significantly higher.

A photo of someone typing on a computer whose browser is open to Alphabet's Google search page.
Source: Castleski / Shutterstock.com

Meanwhile, the stock should also be boosted by the difficulties that a number of previous strong tech names — including Meta Platforms (NASDAQ:FB), Netflix (NASDAQ:NFLX), and Nvidia (NASDAQ:NVDA) — are experiencing.

Finally, in the long-term, I continue to believe that Alphabet will meaningfully benefit from the success of Waymo, its self-driving automobile business.

Ad and Cloud Unit Performance

The revenue of Google’s advertising businesses jumped about 33% year-over-year. That is quite impressive, considering that many Americans were staying at home surfing the internet much of the day in Q4 of 2020, while the lockdowns had greatly eased by Q4 of 2021.

Back in January 2020, I wrote that “Google Cloud’s performance has noticeably improved under the leadership of CEO Thomas Kurian, who took the reins in November 2018.” I stated that “if the unit’s annual revenue run rate rises to $16 billion, versus Alphabet’s 2019 revenue of $161 billion, its growth will really start to move the needle for the company and Google stock.”

In Q4, the unit’s sales came in at $5.5 billion, meaning that its annual run rate last quarter was about $22 billion. I think Cloud’s revenue is indeed helping GOOG stock now, as its sales accounted for nearly 7% of Alphabet’s total revenue in Q4. What’s more, Google Cloud’s backlog at the end of Q4 had soared over 70% year-over-year.

The unit’s operating income was negative $890 million last quarter, a significant improvement versus the $1.2 billion operating income loss that it posted during the same period a year earlier. Indeed, it appears that Cloud will be profitable within a year or so.

Also encouragingly, Alphabet Chief Executive Officer Sundar Pichai said on Feb. 1 that, “Alphabet’s backlog increased more than 70% [YOY in Q4] to $51 billion, primarily consisting of the cloud business.” Among the unit’s impressive customers are Albertsons (NYSE:ACI), LVMH (OTC:LVMUY), Box (NYSE:BOX),  Spotify (NYSE:SPOT), Massachusetts, and the United States Department of Agriculture.

Finally, Alphabet is using advancements that it has made in artificial intelligence (AI) to greatly enhance the capabilities of its search engine. I believe that strategy will help enable Google to remain the leading search engine in the U.S. and many other countries.

GOOG Stock Should Be Boosted by Other Big Names’ Woes

A significant number of the big tech names upon which many fund managers had relied on for steady, constant stock-price increases have, more or less, crashed and burned in recent weeks. Indeed, two of the five members of the famous FAANG group — Meta Platforms and Netflix — are in that category.  Outside of FAANG, Nvidia, PayPal (NASDAQ:PYPL), and Salesforce.com (NYSE:CRM) also fit the description.

Consequently, I think that once the market gets over its largely irrational phobias about the U.S. Federal Reserve, inflation, and Russia, the big tech names that have stayed resilient during the Nasdaq’s 15% correction should be winners as fund managers pour money into the big tech names that proved their steadfastness during the current downturn. And since GOOG stock is down about 14% from its 52 week high of $3,042, it is certainly in that group.

Waymo’s Long-Term Outlook Is Still Strong

In a January 2020 column on GOOG stock, I was very bullish on Waymo, writing that “There are multiple signs that […] Waymo is way ahead of its competitors.” I also mentioned that “Waymo is moving forward with plans that could be easier and more lucrative than operating robotaxi services. Specifically, the company is developing self-driving trucks.”

Perhaps partly due to the Covid-19 pandemic, Waymo has not advanced nearly as quickly as I thought it would two years ago.

Still, the unit is now offering fully autonomous rides to members of the public in San Francisco and Phoenix. And, more importantly, Pichai reported last month that “Waymo Via continues delivering freight in the Southwest U.S. and developing partnerships with key industry players.”

Consequently, I still expect GOOG stock to be meaningfully lifted by Waymo over the long-term.

The Bottom Line on GOOG Stock

Alphabet’s ad and cloud businesses are performing very well. In the medium-term, the shares should get a meaningful spark from the struggles of other large names. And in the long-term, Waymo should provide it with a positive catalyst.

In light of these points, I recommend that investors looking for a good, big tech, growth stock buy GOOG stock.

On the date of publication, Larry Ramer did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015.  Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.  


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