Source: PaxForex Premium Analytics Portal, Fundamental Insight

Many investors often avoid the biggest players in the market because they think these companies are so obvious that they cannot be undervalued. But one tech giant has likely been hiding in plain sight: Alphabet. While the overall market may seem overvalued at the moment, there are several reasons why the advertising giant is not.

First, there's the Google cloud. It is becoming an important source of revenue and growth for the company. Although Amazon and Microsoft dominate the cloud computing industry, Google is still in third place, holding 9% of the market at the end of 2020 - up from 5% in 2017. This segment of Alphabet is up 46% in 2020 over the previous year; revenues rose from $5.838 billion in 2018 to $13.059 billion at the end of 2020. The start of the pandemic has accelerated the business shift to cloud computing, as work-at-home and video conferencing have become commonplace. Alphabet continues to invest in its cloud platform, building collaboration tools and a robust data analytics platform for its customers, which should allow it to continue taking market share from other big players. Although Google Cloud is currently not profitable, the public cloud computing market is estimated to be worth $236 billion.

Second, we can't forget about YouTube. Google is the most visited Web site in the world - and the second most visited is YouTube, its wholly-owned subsidiary. YouTube alone logs more than 34.6 billion monthly visits worldwide and more than 1 billion minutes of daily viewing on the platform. YouTube is the second most popular search engine after Google. It is also the most popular video platform site with more than 2 billion monthly active users.

Also, YouTube ad revenue grew by more than 46% between 2019 and 2020. It will likely continue to grow, as YouTube TV is the second-largest connected TV (CTV) platform, generating $1.5 billion in revenue from CTV ads alone.

YouTube will benefit from the current trend of dropping cable TV. More than 27% of U.S. cable subscribers plan to disconnect it in 2021; among those who have already disconnected, YouTube TV already accounts for 19.6% of that market. In June 2020, Alphabet noted that more than 100 million viewers watch YouTube and YouTube TV on their TV screens each month.

This abundant traffic gives Alphabet access to the best consumer data available. Because YouTube and YouTube TV alone has a huge Alphabet network, advertisers must work with Alphabet to reach the largest number of viewers. Very few platforms have the reach and data that Alphabet has to offer through YouTube, making it much harder for advertisers to switch from YouTube to another platform.

And because YouTube already has such a huge user base, Alphabet can effectively advertise YouTube TV to billions of people at very little cost. It has allowed YouTube TV to quickly become a dominant player in the streaming space. Streaming is expected to grow at an average of 18.3 percent per year through 2026, giving YouTube TV a great opportunity to grow even in prominence in the future as its platform and network continue to attract new viewers.

Alphabet can make YouTube even more profitable as it increases the site's average revenue per user or ARPU. In 2020, YouTube's revenue was about $7.50 per active user per month. Compare that to Facebook, which posted a 7.89 ARPU in the third quarter of 2020 alone, which is more in three months per user than YouTube did in a full year. If YouTube can grow to manage at least a fraction of Facebook's ARPU, it will drive up Alphabet's value even more in the top and bottom lines.

Despite being one of the largest companies in the world, worth more than $1.4 trillion, Alphabet is still a very dynamic company. Its share of the online advertising market is slowly declining, but it still has more than 30 percent of the U.S. advertising market. According to market research firm Morningstar, the digital advertising market is expected to grow at an average annual rate of 14% from 2022 to 2024. Alphabet will undoubtedly benefit from the growth of the advertising market, as well as the pace of YouTube's growth. 

Alphabet also managed to increase its operating profit by 20% in 2020, which is impressive for such a large company. With an operating profit of about 23%, Google is an extremely profitable enterprise, allowing management to continually reinvest in the business.

The stock currently trades at a forward price-to-earnings ratio averaging 26 times, and about 20 times its best-projected earnings. With the S&P 500 trading at a forward P/E of 25.35 times, Alphabet looks extremely favorable. Investors can own one of the highest-quality businesses in the world, almost as many as the S&P, without owning the number of not-so-big companies that make up the index. If investors owned Alphabet stock since the beginning of 2020, the return would be 54%, while investors in the index would only get 18%.  

It's hard to believe that a company as widely known and discussed as Alphabet could be undervalued. But in the long run, the YouTube platform and continued investment in Alphabet's cloud offering will likely create more value for investors. 
 

While the price is above 2010.00, follow the recommendations below:

• Time frame: D1
• Recommendation: long position
• Entry point: 2060.00
• Take Profit 1: 2140.00
• Take Profit 2: 2253.0

Alternative scenario:

If the level 2010.00 is broken-down, follow the recommendations below:

• Time frame: D1
• Recommendation: short position
• Entry point: 2010.00
• Take Profit 1: 1947.00
• Take Profit 2: 1800.00