Source: PaxForex Premium Analytics Portal, Fundamental Insight
If you're new to investing, you may feel like you haven't seen all the significant market giants. Netflix, Amazon, and other tech stocks have risen so much in the past that it's hard to see how they can bring investors solid returns in the future.
One such stock is Alphabet, the mother company for Google, YouTube, and Google Cloud. The company's stock has risen nearly 800% in the past decade and has a market value of $1.75 trillion.
Is it too late to invest in Alphabet? Let's try to find out.
On Feb. 1, the company posted its results for Q4 and calendar year 2021. Revenue in 2021 rose 41% to $257 billion, helped by a resurgence in digital ad spending as the world slowly emerges from the coronavirus pandemic. Profits followed suit, with operating profits up a staggering 91% in 2021 to $78.7 billion.
Why is operating profit growth so much faster than revenue growth? Because Alphabet gets a lot of operating leverage as it expands its business. Last year, the operating margin across the company's business will be 31%, up from 23% in 2020. And that's with the Google Cloud and Other Stakes segments still burning more than $2 billion combined each quarter. If/when these cash-burning departments become profitable, Alphabet's consolidated operating margin will continue to grow.
With a market capitalization of $1.75 trillion, Alphabet trades at a trailing price to operating income (P/OI) of 22.2, which is roughly in line with the market average. So investors should not worry about compression multiples when buying Alphabet stock. There is only one question left: Where will future growth come from?
We've already mentioned the constant operating leverage Alphabet should get as it matures, but let's talk about each of its segments in more detail.
Foremost, we have the core business of Google Services, which includes search, Google Maps, YouTube, Android (a mobile operating system with 70% market share worldwide), and other smaller businesses like Google Drive. In Q4 alone, sales in this segment were $63 billion, mostly driven by Google Search. The growth of these operating units will come from the growth of digital advertising worldwide. In 2021, global digital ad spending was $455 billion. By 2024, that number is expected to be about $650 billion. If those projections hold true, much of that growth will come from Google Search, YouTube, Maps, and other Google products.
Alphabet's second major business, and the only one currently generating significant revenue, is Google Cloud. In Q4 2021, sales in this segment were $5.5 billion, giving it an annualized revenue of $22 billion. Google Cloud has the third-largest market share at 8%, behind Amazon Web Services and Microsoft Azure, but it can still show the long-term development of the cloud market for years to come. For instance, some experts believe that total cloud spending will grow 15% a year between now and 2030. If Google Cloud continues to provide valuable services to customers, it could win some of that new spending.
Finally, we have Other Stakes, a division of Alphabet that has "shot the moon." Here are startups like Waymo (self-driving cars), Google Fiber, Google Ventures, smart home devices Nest, and many other projects. These operating units are not generating much revenue for the company's overall business at the moment, but they provide plenty of opportunities to grow the business in the long run.
In addition to strong growth and plenty of long-term benefits, Alphabet's finance department has begun returning cash to shareholders in the form of share repurchases. Alphabet will repurchase $50 billion worth of stock in 2021, backed by $67 billion in free cash flow generated last year and $140 billion in cash on the company's balance sheet.
Why are stock buybacks useful? Because they reduce the total number of shares in the company by increasing the percentage of each existing shareholder's ownership of the shares they still own. With such strong cash generation and a huge war reserve, investors should anticipate the management to continue repurchasing shares over the next few years.
Even though Alphabet's market value reaches $2 trillion, it's hard to imagine a world where the company won't be much bigger in five or ten years. If total revenue grows 10%-plus a year, operating margins increase, and share buybacks continue, investors will probably have a good chance of buying Alphabet stock in the next several years and beyond.
As long as the price is below 2680.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 2534.00
- Take Profit 1: 2492.00
- Take Profit 2: 2400.00
Alternative scenario:
If the level of 2680.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 2680.00
- Take Profit 1: 2850.00
- Take Profit 2: 3035.00
