- Alphabet (GOOG, GOOGL) remains a conservatively-run company
- Google Cloud is the riskiest unit, but growth justifies the losses
- Antitrust problems look manageable
Alphabet (NASDAQ:GOOG, GOOGL), which will split its stock 20:1 in July, remains true to its tech roots.
Google began by trying to solve the technical problem of search at scale. While Wall Street analysts have called it an Internet company and a media giant, it remains true to that search mission. Despite being led by a former Morgan Stanley (NYSE:MS) executive in CFO Ruth Porat, Google continues to take the road less traveled by. That has made all the difference.
Like the other Cloud Czars, Google has had a rough start to 2022. Its stock is down by 12%. GOOG stock opened April 19 at $2,561.50, GOOGL at $2,554 (the latter have some voting rights). This puts the market cap at $1.68 trillion and brings the price to earnings ratio down to 22.7.
| GOOG | Alphabet Inc. | $2,617.95 |
Long Term Attitude
For a company on the bleeding edge of change, Google is run with a very long-term view.
Search remains at the heart of everything. The problems of search built the cloud. The opportunities of search drove its acquisition strategy. Alphabet next reports earnings May 3. Analysts expect earnings of $25.93/share on revenue of about $68 billion.
Tech stocks, even profitable ones like Google, have fallen out of favor because inflation raises the risk-free returns from buying debt. There’s not much Google debt to buy, less than $15 billion worth at the end of 2021, against a cash balance of $21 billion (there’s also $118 billion of short-term securities on the books.) Google’s debt currently carries a yield of 2.81%, lower than a 10-year U.S. government bond.
The riskiest move Google has made in a decade is also the most obvious. That is to sell its cloud services in competition with Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN). Due to its late start, Google still has a single-digit share in that market according to Canalys. In contrast to rivals, it also loses money selling cloud, $890 million last year. But it’s growing that business with improving margins.
Google became a media giant almost by default. Its 2006 purchase of YouTube for $1.65 billion, considered a risk at the time, has proven to be one of the greatest deals of all-time. YouTube generated $8.6 billion in ad revenue during 2021, up 25% from 2020. There’s also subscription revenue from the ad-free version or YouTube TV, the cable replacement.
Reining In Other Bets
Under Porat, who became CFO in 2015, Google has reined in the “other bets” of co-founders Larry Page and Sergey Brin. She’s provided rigor to the group, spinning-off things like quantum computing unit Sandbox, slowing the growth of Google Fiber and quieting the drama around driverless car company Waymo.
Her acquisitions have been pure “bolt-ons,” like Mandiant (NASDAQ:MNDT), a cybersecurity firm for which it’s paying $5.4 billion. Mandiant will give Google Cloud what it calls an “end to end security suite.”
The Bottom Line on GOOG Stock
The biggest risk to GOOG stock is government.
Europe’s Digital Markets Act takes direct aim at the Chrome browser and Android mobile phone design. Under the act Google must also get explicit permission to collect personal data on each of its services.
The U.S. Justice Department wants legislation that would keep the company from favoring its own solutions over rivals. There’s also a new class action suit against Google Maps filed on behalf of developers.
The problems are manageable because of Google’s size and its importance to the digital ecosystem. Even in China, where Google is considered illegal, it has almost 3% of the search market.
The simple truth is we can’t live without Google. Its services are essential to improving global productivity. Policy makers know this. So long as it’s run conservatively, it will remain a safe place for your money.
On the date of publication, Dana Blankenhorn held long positions in GOOGL, MSFT and AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
