3 reasons to buy Alphabet and 1 reason to sell
Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), the parent company of Google, is one of the world’s largest tech companies. If you had invested $ 1,000 in its IPO in 2004, your investment today would be worth around $ 63,500.
This is great news for first-time investors, but people who don’t already own Alphabet might be wondering if it’s not too late to buy that FAANG stock. Today I’m going to go over three compelling reasons to buy Alphabet – along with one reason to sell it – to see if it’s still a good long-term investment.
1. It is a dominant force in online advertising
Google’s sprawling ecosystem includes the world’s most popular online search engine, mobile operating system (Android), video streaming site (YouTube), web browser (Chrome) and platform mailbox (Gmail).
These platforms all support the core advertising business of Google, which sells search, display, and video ads on its platforms. Google will likely account for 28.6% of all digital ad spend globally this year, according to eMarketer, placing it in first place ahead Facebook‘s (NASDAQ: FB) 25.2% share.
All the little rivals of Google and Facebook, including Ali Baba (NYSE: BABA), Amazon (NASDAQ: AMZN), and Tencent Holdings (OTC: TCEHY)– still hold single-digit shares of the digital advertising market. Therefore, any business looking to advertise online will likely visit Google and Facebook before considering other platforms.
Last year, Alphabet’s revenue from Google ads grew 9% to $ 146.9 billion, or 80% of its revenue, even as the pandemic pushed companies to buy fewer ads. In the first half of 2021, Google’s advertising revenue jumped 50% year-over-year to $ 95.1 billion as headwinds related to the pandemic receded.
2. The growth of Google Cloud
Google’s advertising activity suffered a temporary slowdown in 2020, but Google Cloud‘s revenue jumped 46% to $ 13.1 billion as usage of its cloud services accelerated throughout the year. pandemic. Segment revenue grew a further 50% year-over-year to reach $ 8.7 billion in the first half of 2021.
Google Cloud is not yet profitable, and it still ranks third in the cloud infrastructure market behind Amazon (NASDAQ: AMZN) Web Services (AWS) and Microsoft (NASDAQ: MSFT) Azure, after Canalys.
However, Google Cloud continues to expand and secure a growing list of major partners, including Target, Home deposit, Twitter, and Pay Pal. Many of these customers probably don’t want to support Amazon’s most profitable business (as they compete with its retail business) or tie up with Microsoft’s other corporate prisoner-capture services.
Google Cloud’s profitability is expected to improve as it expands, but it can subsidize its growth with its higher margin advertising business until that happens. The global cloud computing market could grow at a compound annual growth rate (CAGR) of 19.1% between 2021 and 2028, according to Research and Markets, so that Google’s cloud business could continue to grow faster than its main advertising activity for the foreseeable future.
3. Its reasonable valuation
Analysts expect Alphabet’s revenue and profits to grow 37% and 72%, respectively, this year, against easy comparisons with the effect of the pandemic on its advertising business. Next year, they expect its revenue and profits to increase by 17% and 5%, respectively, as those year-over-year comparisons normalize.
Based on these expectations, Alphabet is trading at 26 times forward earnings and seven times forward sales, making it more reasonably priced than many of the foamy growth stocks in the tech industry.
The only reason to sell Alphabet: antitrust threats
Alphabet’s core businesses appear strong, but a series of antitrust battles could derail their growth.
Last October, the US Department of Justice filed an antitrust complaint against Google for its alleged monopolization of the online search and search-based advertising markets, and it is reportedly preparing to file a second antitrust complaint to remedy the situation. Google’s dominance over certain advertising technologies. Two separate state coalitions have also filed their own lawsuits against Google over its search and advertising activities.
The European Commission previously investigated Google Shopping, Google AdSense and Android, then accused Google of exploiting these platforms to drive competitors out of their respective markets. Those antitrust investigations resulted in three separate fines totaling more than $ 8 billion and forced Google to stop bundling its proprietary apps with new Android devices in Europe. If the DOJ case follows a similar path, Google could face even higher fines and more demands to split its ecosystem.
Google is also facing other antitrust battles in Australia, India and South Korea, and more countries could jump on the bandwagon. All of this pressure could prevent investors from paying a higher premium for Alphabet shares.
Alphabet remains a solid long-term investment
Alphabet’s antitrust challenges can’t be ignored, but they don’t negate its strengths yet. Alphabet will likely continue to grow, even if it is hit with fines and new restrictions along the way.
In the worst case, Alphabet could be split into several smaller companies. However, Alphabet investors would likely continue to receive new shares from these small companies – which could continue to grow independently without being tied to Google’s sprawling ecosystem.
Alphabet is not my favorite FAANG stock and I personally don’t own any stock, but investors who buy the stock today could still be well rewarded if they cut the noise out in the short term.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.