Alphabet Stock Trading Above $3,000 Is Just a Matter Of Time

There are few stocks that investors can hold in the long-term portfolio without any second thought. I believe that Alphabet (NASDAQ:GOOG) stock is among the top core portfolio stocks to consider.

Alphabet Inc. (GOOG, GOOGL) and Google logos seen displayed on a smartphone
Source: IgorGolovniov / Shutterstock.com

Talking about the recent performance, GOOG stock has been sideways for the last six-months. This does not come as a surprise with the correction in technology stocks. As a matter of fact, GOOG stock has out-performed the NASDAQ index during this period.

I believe that the stock is poised for a break-out above $3,000. Fresh exposure to the stock can be considered. My view is backed by the fact that, GOOG stock trades at a forward price-to-earnings-ratio of 23.4. This is attractive for a company with robust earnings growth.

I would add here that 46 analysts have a 12-month median price target of $3,500 for the stock. This represents an upside potential of 25.6%. Backed by strong fundamentals and innovation, GOOG stock will continue to create value.

Let’s look at the specific factors that will serve as catalysts for earnings growth and cash flow upside.

Innovation Driven Growth

The first point that I want to highlight is the company’s big investments in research and development. For 2020, Alphabet invested $27.6 billion in research and development. Investments have further increased to $31.6 billion for 2021.

For Q4 2021, Alphabet reported free cash flow of $18.6 billion. This would imply an annualized FCF potential of $75 billion. Given the financial flexibility, it’s likely that Alphabet will continue to make aggressive investments in R&D. This is a key catalyst for growth and new revenue stream in the coming years.

Also, with a strong balance sheet, Alphabet has focused on acquisitions that drive growth and boost innovation. Recently, Google announced the intent to acquire Mandiant (NASDAQ:MNDT) for a total consideration of $5.4 billion. Mandiant is a leader in dynamic cyber defense and response. This acquisition is likely to improve Google Cloud’s ability to tackle cyber-security challenges.

Talking about Google Cloud, the segment reported revenue growth of 46.6% in 2021 to $19.2 billion. Considering the global cloud market potential, growth is likely to remain robust for this segment.

For 2020, Google Cloud had reported operating level loss of $5.6 billion. Last year, losses narrowed to $3.1 billion. In the next five-years, the segment is another potential cash flow machine for the company.

Betting on Hardware Devices

The hardware segment is also likely to get bigger in the coming years. The segment currently includes Fitbit wearable devices, Google Nest home products, and Pixel phones.

In January 2021, the company acquired Fitbit for a consideration of $2.1 billion. It’s estimated that the wearable device market is expected to reach $118.16 billion by 2028. This represents a big opportunity for the likes of Google and Apple (NASDAQ:AAPL).

Google Nest home products also seems positioned for sustained growth. As an example, Google had a market share of 8.7% in the global smart-speaker shipment in Q4 2016. By the third quarter of 2021, the company’s market share had increased to 20.5%.

Google recently acquired Raxium, which is a start-up that develops microLEDs for use in augmented reality. This might be an early indication of the company’s interest in AR hardware.

With a robust cash buffer, Google is likely to continue using the acquisition route to expand the portfolio of hardware devices.

The Bottom Line

Google classifies on business segment as “other bets” and it generated revenue of $753 million for 2021. In this segment, the company has invested in the areas of areas of health, life sciences, and transportation.

It’s worth mentioning here that companies like Amazon (NASDAQ:AMZN) and Apple have also been making inroads into the healthcare sector. This is an indication of the potential healthcare technologies holds in the future.

Overall, Google has a strong balance sheet and the company has been investing in research and acquisitions. Over the next five to teen years, Google is likely to be a more diversified organization.

GOOG stock has been sluggish in the last six-months. However, considering the factors discussed, a break-out on the upside seems imminent as revenue and earnings growth sustains.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.


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