Source: PaxForex Premium Analytics Portal, Fundamental Insight
In 2020, investors focused on the technology sector chased a large number of high-growth stocks with high valuations. In 2021, though, that strategy backfired, as concerns about inflation and rising interest rates trounced many of these high-growth stocks.
As investors ignored the more speculative tech stocks, sustainable giants like Alphabet, the parent company of Google, became more appealing investments. Over the past year, Alphabet's stock price has risen 66.8%, while the S&P 500 is up just 27.2%.
Alphabet's market-beating rally confirms that the best investments are often hidden from view, but is it too late to jump on that wagon?
In 2020, Alphabet generated 80 percent of its revenue from Google's advertising services. Google's non-advertising business (including subscriptions and hardware) accounted for 12%, with another 7% coming from Google Cloud.
Alphabet's total revenue in 2020 was up 13%, even though the pandemic slowed the growth of Google's advertising business in the first half of the year. Google Cloud's growth during the year also softened the blow.
Google's advertising business recovered in the second half of the year, and Alphabet's operating margin rose from 21% in 2019 to 23% in 2020. Diluted earnings per share (EPS) also rose 19%.
For the first nine months of last year, Alphabet's revenue grew 45% year over year as Google's advertising and cloud businesses grew in tandem. The company's operating margin rose to 36% and diluted earnings per share jumped 124%.
For the full year, experts anticipate Alphabet's revenue and earnings to increase 39% and 85%, respectively. Next year, they expect revenue and earnings to grow 17% and 4%, respectively, as year-over-year comparisons slowly go back to normal in a post-pandemic market.
Alphabet's business is stable because its ecosystem is virtually unshakable. It owns the world's largest search engine, the most popular mobile OS (Android), the best web browser (Chrome), the leading streaming video platform (YouTube), and the most widely used webmail platform (Gmail).
According to eMarketer, Google accounted for 28.6 percent of all digital ad spending worldwide in 2021. Meta Platforms, the parent company of Facebook and Instagram, is second with a share of 25.2%.
Google's and Meta's dominance of the online advertising market allows them to generate a lot of cash and resist constant challenges from regulators, including antitrust fines, privacy-related inspections, and calls to split their huge business. Their services will continue to be controversial, but companies that need to advertise their trademarks online will definitely move toward Google, Facebook, and Instagram before buying ads on smaller platforms.
According to Canalys, Google controlled just 8 percent of the global cloud infrastructure market in Q3 of 2021. That puts it in third place behind Amazon Web Services (AWS) (32%) and Microsoft Azure (21%), but it remains a possible option for businesses that don't want to support Amazon's most profitable business or be tied to Microsoft's enterprise software and services.
Companies such as PayPal, Twitter, and Home Depot already use Google Cloud, and the company could attract even more customers by lowering prices on AWS and Azure. Google will then be able to make up for those losses with its highly profitable advertising business. Google is also keeping up with its cloud competitors -- its cloud revenue grew 45% year over year in the last quarter, compared with a 39% increase in AWS and a 50% increase in Azure in recent quarters.
Alphabet's advertising and cloud businesses are well protected against inflation. Companies will continue to buy advertising as their other costs rise, and they will continue to pay Google Cloud to keep their websites and apps online.
Alphabet stock is trading at 26 times projected earnings and less than seven times next year's sales, though it is near its all-time high. These reasonable estimates show that Alphabet still has room to grow in 2022.
As long as the price is below 3019.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 2886.00
- Take Profit 1: 2770.00
- Take Profit 2: 2709.00
Alternative scenario:
If the level of 3019.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 3019.00
- Take Profit 1: 3125.00
- Take Profit 2: 3189.00
