Google Cloud Will Drive Future Profits and Upside in Alphabet Stock

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  • Alphabet (NASDAQ:GOOGL) may miss on Q2 earnings if ad revenue falls.
  • Google Cloud is poised to become a profit driver.
  • GOOGL stock remains a solid bet in the face of inflation.
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Alphabet (NASDAQ:GOOGL), the engineers formerly known as Google, is America’s best weapon against inflation. With costs for labor, energy and raw materials skyrocketing, there may be no better place to put your money than GOOGL stock.

It’s true that GOOGL stock is down 24% in 2022. But bear markets pass. What’s happening is that Google’s earnings multiple is being compressed. It’s now worth less than 20 times earnings, which is a reasonable valuation.

We take past Google miracles for granted. The idea that you can answer any question, from literally anywhere, was science fiction when I became a journalist. But no one is buying yesterday. We want to know how Google will make money for us tomorrow. The answer lies in getting businesses to pay for its cloud.

GOOGL Alphabet $2,195.29

Cloud Profit Coming

I may be one of the fiercest critics of Google Cloud chief Thomas Kurian. Despite enormous investment, and enormous public praise, Kurian hasn’t gotten Google Cloud’s market share out of the single digits. As Google’s first-quarter results make clear, he hasn’t made the company any money, either. Google Cloud lost $931 million in the last quarter, $43 million more than a year earlier.

All that may be about to change, though. Google is expanding its software services into open-source cybersecurity. It is letting customers bring artificial intelligence and machine learning directly into their data centers. Even if Google Cloud doesn’t report market share gains, the unit is growing by 40% per year. Its value to business customers is also increasing.

As companies look to fight inflation by taking costs out of supply chains, workflows and distribution channels, cloud software is their best weapon. Kurian has spent over three years now transforming Google Cloud from an infrastructure company into a software company. Instead of providing plain infrastructure customers must turn into applications, Kurian now sells operating systems and software tools customers and other software companies depend on to run their operations.

Google Cloud was Intel (NASDAQ:INTC). Now it’s Microsoft (NASDAQ:MSFT). I’d rather be Microsoft.

What Cloud Profit Means for Investors

Once Google Cloud starts showing a profit, which I think will happen later this year, the underlying company will be transformed.

That’s because, right now, Google is still an advertising company. Over 80% of its revenue last year came from ad-based services. While advertising revenue may be on the decline, analysts are still expecting big things from Alphabet. The consensus estimate is for profits to rise 7% from the last quarter to $26.55 a share, and for revenue to increase 4% to $70.85 billion. They may be disappointed.

Whether Google meets its quarterly numbers is less important than that it uses cloud profits to beat full-year estimates of $111.52 a share in earnings ($5.57 post-split) and $297 billion in revenue. If it can hit those marks, investors in GOOGL stock will be paying less than 5 times revenue for 15% growth at a time when other companies are flailing or failing.

To me, that spells safety and long-term value. Selling ads against anything is a bet on the economy. Selling services that cut costs is a much firmer platform for growth.

The Bottom Line on GOOGL Stock

Google search, Google Android, Google YouTube and all other Google services ride on Google’s cloud.

Google put nearly $10 billion into purchases of property and equipment last quarter. It still had over $15 billion in free cash flow.

There’s short-term risk in GOOGL stock, as the company’s ad-based services are tied to the economy. That risk is reduced by the profit potential of Google Cloud. Selling subscription software to business pays for itself in productivity and lower operating costs.

We like to think of Google as essential consumer infrastructure. If it also becomes essential business infrastructure, its future growth ceiling is unlimited.

On the date of publication, Dana Blankenhorn held long positions in GOOGL, MSFT and INTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


Article printed from InvestorPlace Media, https://investorplace.com/2022/06/google-cloud-will-drive-future-profits-and-upside-in-googl-stock/.

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