News & Analysis

Is Google (still) a good investment?

09 Jul 2021 | by: Kirsteen Mackay

Is Google (still) a good investment?

Search engine Google is owned by Alphabet (NASDAQ: GOOGL, NASDAQ: GOOG). The company is a multi-national conglomerate with several lucrative income streams. Alphabet’s leading source of income is Google, which it reports as two separate entities: Google Services and Google Cloud.

Combined, Google Services and Google Cloud accounted for roughly 99% of Alphabet’s consolidated revenues in 2020.

Google Services include Google Search, YouTube, Android, Google Chrome, Hardware, Google Maps, and Google Play.

Is Google a good investment?

Google Services makes money from performance advertising and brand advertising.

However, the company is constantly looking to grow its revenues from sources other than advertising. This includes hardware sales, Google Play app sales, and YouTube subscriptions.

Meanwhile, its Google Cloud segment makes money from client service fees and Google Workspace collaboration tools.

Alphabet reports all its non-Google businesses collectively as Other Bets. These include such life-changing projects as self-driving cars and cancer cures.

Essentially, these ‘other bets’ are emerging businesses at various stages of development. This is very much an R&D incubator incorporating those at the conception stage to those in early commercialization.

Recent examples include Waymo driverless cars, Wing drone deliveries, Verily and Calico life sciences, and healthcare companies.

Alphabet now has a market value exceeding $1.7 trillion, so, naturally, investors wonder, “Is Google a good investment, and should I buy Google stock?”.

Why is Google called Alphabet?

The company was founded in 1998 and was known as Google until 2015. It then changed its name to Alphabet to better incorporate its various businesses.

In a statement at the time, co-founder Larry Page said the public “can expect us to make smaller bets in areas that might seem very speculative or even strange when compared to our current businesses.”

Google Maps, Chrome, YouTube, and Android all started small and became major successes.

Page also liked that the new name represented an apt play on words:

“We also like that it means alpha‑bet (Alpha is investment return above benchmark), which we strive for!”

What is the difference between Google share classes?

Google has two classes of shares listed on the NASDAQ. There are Google’s A shares (GOOGL) and Google’s C shares (GOOG).

It also has B shares which the company founders and their peers privately own.

The owners of B shares have more voting power than other shareholders, receiving 10 votes per share.

Meanwhile, shareholders in Google’s A shares get one vote per share, and owners of C shares get no votes.

C shares currently trade at a higher premium than A shares, which is the opposite of its historical trading pattern.

This is most likely due to Google’s share buyback program.

Traditionally GOOGL class A shares have been more liquid than C shares.

Fundamentals of Google stock

Even the most profitable of companies requires careful consideration before investors should jump in and buy shares.

Here’s an overview of Alphabet’s financial fundamentals.

Revenues

Google’s total revenue came in at $182.5bn in 2020, rising 12.7% year-over-year.

$146.9bn of this was from advertising revenue. $13bn came from Google Cloud and $657m from Other Bets.

Profitability

In Q121, Alphabet enjoyed its third straight quarter of record profit, beating analyst expectations.

The pandemic boosted Alphabet’s coffers as businesses paid for Google ads to target consumers spending more time online.

It also enjoyed a record $6bn in revenue from YouTube ads, a 49% rise on Q420.

Its cloud business also benefited from companies opting to move to remote data centers to help streamline their business, cut costs and enhance security. This segment grew 46% QoQ.

Alphabet is a cash-rich company with $28bn in debt and $135bn in cash on the balance sheet.

Operating Margins

For the quarter ended March 31, 2020, Alphabet’s operating margin was a respectable 19%. A year later and its operating margin came in at a whopping 30%.

Alphabet appears in 276 exchange-traded funds (ETFs), with 32.8m GOOGL shares in US ETFs.

Google doesn’t offer a dividend.

Its price-to-earnings ratio (P/E) is 33, and its EV/Sales ratio is 8.1x

Between February and March 2020, as the pandemic began to take hold, the Alphabet share price plunged 31%.

Since then, it’s well and truly recovered, bouncing 150%.

Is Google (still) a good investment?
GOOGL share price rise since the pandemic plunge

Gross Profit Margins

Google’s gross profit margin came in at 53% in 2020.

What is the bull case for Google?

Alphabet has a lot going for it. First and foremost, the Google search engine is far and away the most dominant in its space.

Google Search remains its primary revenue source. And with an 87% market share in the search sector, this affords the company an impressive moat.

A company moat is what Billionaire Warren Buffett refers to as a key feature that gives a business its competitive edge.

Improving Google Search depends on improving its artificial intelligence, which relies on more and more users interacting with the platform.

Therefore, the success of Google becomes a self-fulfilling prophecy as an improved search experience attracts more users.

Furthermore, Android is by far the world’s biggest operating system. This also gives Google a competitive edge.

Google is also involved in email, social media, analytics, robotics, artificial intelligence, augmented reality, health tech, and much more.

Having extensive cash on hand, and the means to borrow, gives it added bargaining power when it comes to M&A.

Simply put, if it spots a disruptive player in the market, it can simply swoop in and buy them out, just like it did when it bought YouTube for $1bn and Fitbit for $2.1bn.

Future growth opportunities

Alphabet’s future growth could come from YouTube, its Google Cloud offering, and advancements in hardware.

YouTube is enjoying a surge in growth as more consumers opt to sign up to its premium package and content providers see the value it offers.

Several celebrity names are joining the platform, as are mainstream media and providers of high-quality informational content.

For many users, YouTube is the first place they search for answers as opposed to Google directly.

Users search YouTube for answers
Photographer: Alexander Shatov | Source: Unsplash

Google Cloud is also enjoying revenue growth. This is a sector expected to see continued demand as security and reigning in costs become paramount.

Google’s hardware segment includes consumer-facing devices such as healthcare technology, including wearables, home devices (Google Nest), phones, streaming devices, tablets, and video cameras.

Meanwhile, Alphabet is aggressively advancing investment in the wearable space. It acquired Fitbit earlier in the year and is now upgrading its smartwatch and Wear Operating System to Wear OS 3.0.

The smartwatch market is a competitive but growing sector. Consumers enjoy the extra dimension and control it adds to their lives, from managing schedules to fitness and health tracking.

Alphabet’s competitors in the hardware space include Apple (NASDAQ: AAPL), Garmin (NASDAQ: GRMN), Amazon (NASDAQ: AMZN), Huawei, and Samsung (KRX: 005930).

Share buybacks

When a company buys back its stock, it reduces the number of shares in circulation. This increases their value to existing shareholders.

In Q121, Alphabet repurchased $11.39bn of its GOOG stock, and announced an additional $50bn class C GOOG stock buyback to commence this year.

This $50bn share repurchase program is likely to be why class C shares are currently trading at a higher price than class A shares.

This follows a $25bn buyback program in 2019, leaving around $56bn still to be spent on repurchasing GOOG shares.

What is the bear case for Google?

When it comes to investing, even the top companies face pitfalls. Here are some reasons to be wary of buying shares in Alphabet.

Regulatory scrutiny

As with other large-cap technology stocks, Facebook (NASDAQ: FB), Amazon, and Apple, Google is another stock facing mounting regulatory scrutiny. It’s also been subject to several antitrust lawsuits.

In 2017, Google was fined €2.4bn by the EU for manipulating search results to promote its shopping sites.

Discontinued projects

Not everything Google touches turns to gold. In fact, many of its exciting new projects end up in the discontinued bin.

Wave, Buzz, Knol, Google Offers, Google Reader, Google+, Google Hangouts, and Google Glass are just a few disappointing projects that underwhelmed the market.

Growth may slow

At its most recent earnings call, the company warned the recent surge in growth is due to the pandemic and unlikely to continue at pace.

Billionaire investor Warren Buffett does not own Alphabet stock. He has said that he regrets missing out but, right or wrong, lacks the conviction to buy at this later stage.

Despite an exceptional profit and cash boost, 2020 was Alphabet’s lowest period of sales growth in 11 years.

Competition and Macro factors

Its Google Cloud division faces tough competition from Amazon and Microsoft (NASDAQ: MSFT).

Furthermore, various macro factors could lead to bear market conditions.

For instance, the global semiconductor shortages could impact the production of its hardware. And rising commodity prices could affect profit margins.

Then there’s the risk of a major stock market correction or crash. US tech stocks have been on a significant bull run in recent years, and a considerable pullback could take a long time to recover from.

We live in a low-interest environment, but if inflation becomes a big problem and interest rates are raised, tech stocks may suffer.

Should I invest in Google stock?

Google is a $1.7 trillion company, so it’s clearly getting something right and providing shareholder value in its quest to be the best.

Its 87% market share in search is remarkable.

But its P/E of 33 may put some investors off as potentially overvalued.

Meanwhile, the company has said growth is unlikely to continue at record rates.

However, it’s involved in many lucrative areas of demand in the online and tech arena.

It’s also a popular stock owned by major institutions and has considerable cash reserves.

Altogether Alphabet appears to be a fairly safe investment as far as stocks go.

Valuethemarkets.com, Digitonic Ltd (and our owners, directors, officers, managers, employees, affiliates, agents and assigns) are not responsible for the content or accuracy of this article. The information included in this article is based solely on information provided by the company or companies mentioned above.

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

  • Kirsteen Mackay does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.
  • Kirsteen Mackay has not been paid to produce this piece by the company or companies mentioned above.

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