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alphabet (NASDAQ: Goog) (NASDAQ: GoogL), the parent company of Google, is one of the largest technology companies in the world. If you had invested $ 1,000 when it went public in 2004, your investment today would be worth about $ 63,500.
This is great news for early investors, but folks who don’t already own Alphabet may be wondering if it’s too late to buy this FAANG share. Today I’m going to review three compelling reasons to buy Alphabet – plus one reason to sell – to see if it’s still a good long-term investment.
Image source: Getty Images.
1. It is a dominant force in online advertising
Google’s sprawling ecosystem includes the world’s most popular online search engine, a mobile operating system (Android), a streaming video site (YouTube), a web browser (Chrome), and an email platform (Gmail).
These platforms all support Google’s core business, which sells search, display and video ads on its platforms. According to eMarketer, Google is expected to account for 28.6% of all digital advertising spend worldwide this year, making it number one Facebook‘S (NASDAQ: FB) 25.2% share.
All of Google and Facebook’s smaller rivals – including Alibaba (NYSE: BABA), Amazon (NASDAQ: AMZN), and Tencent stocks (OTC: TCEHY)– still hold a single-digit share of the digital advertising market. Hence, any business looking to advertise online will likely check out Google and Facebook before considering other platforms.
Last year, Alphabet’s revenue from Google Ads rose 9% to $ 146.9 billion, or 80% of its revenue, despite the pandemic driving companies to buy fewer ads. In the first half of 2021, Google’s advertising revenue rose 50% year over year to $ 95.1 billion as these pandemic headwinds subsided.
2. The growth of Google Cloud
Google’s advertising business suffered a temporary slowdown in 2020, but Google Cloud revenue rose 46% to $ 13.1 billion as the use of its cloud services accelerated during the pandemic. The segment’s revenue increased a further 50% year over year to $ 8.7 billion in the first half of 2021.
Google Cloud is not yet profitable and still ranks a long way behind in third place in the cloud infrastructure market Amazon (NASDAQ: AMZN) Web Services (AWS) and Microsoft (NASDAQ: MSFT) Azure, according to Canalys.
However, Google Cloud continues to expand and secure a growing list of key partners, including target, Home depot, Twitter, and PayPal. Many of these customers likely do not want to support Amazon’s most profitable business (as they compete with the retail business) or commit themselves to Microsoft’s other prisoner corporate services.
Google Cloud’s profitability should improve as it expands, but until then it can subsidize its growth with its higher-margin advertising business. The global cloud computing market could grow at an average annual growth rate (CAGR) of 19.1% between 2021 and 2028, according to Research and Markets, so Google’s cloud business could continue to grow faster than its core advertising business for the foreseeable future .
3. Its fair evaluation
Analysts expect Alphabet’s sales and earnings to rise 37% and 72% respectively this year, compared to simple comparisons to the impact of the pandemic on the ad business. In the next year, they expect sales and earnings growth of 17% and 5% respectively, if the comparisons normalize in a year-on-year comparison.
Based on those expectations, Alphabet trades at 26 times its futures earnings and seven times its futures sales – which rates it more reasonably than many of the tech companies frothy growth stocks.
The only reason to sell Alphabet: antitrust threats
Alphabet’s core businesses look strong, but a series of cartel wars could stall their growth.
Last October, the U.S. Department of Justice filed an antitrust lawsuit against Google for allegedly monopolizing the online search and search-based advertising markets, and is allegedly preparing to file a second antitrust lawsuit to undo Google’s dominance in certain advertising technologies. Two separate coalitions of states have also filed their own lawsuits against Google over its search and advertising business.
The European Commission previously investigated Google Shopping, Google AdSense and Android and then accused Google of using these platforms to drive its competitors out of their respective markets. These antitrust investigations resulted in three separate fines totaling more than $ 8 billion and forced Google to stop bundling its first-party apps with new Android devices in Europe. If the DOJ’s case takes a similar path, Google could face even higher fines and more demands to split its ecosystem.
Google is also facing additional cartel warfare in Australia, India, and South Korea, and more countries may jump on the bandwagon. All of this pressure could prevent investors from paying a higher premium on Alphabet stock.
Alphabet is still a solid long-term investment
Alphabet’s antitrust challenges cannot be ignored, but they do not yet undermine its strengths. Alphabet is likely to continue to grow, even if fines and new restrictions hit it along the way.
In the worst case scenario, Alphabet could be split up into several smaller companies. However, Alphabet’s investors would likely still get new shares in these smaller companies – which could continue to grow independently without being tied to Google’s sprawling ecosystem.
Alphabet isn’t my favorite stock of FAANG, and I don’t personally own any stocks, but investors who buy the stock today could still be well rewarded for blocking out the short-term noise.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, serves on the Board of Directors of The Motley Fool. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Leo sun owns shares in Amazon. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd., Alphabet (A shares), Alphabet (C shares), Amazon, Facebook, Home Depot, Microsoft, PayPal Holdings, Tencent Holdings, and Twitter. The Motley Fool recommends the following options: long January 2022 $ 1,920 calls on Amazon, long January 2022 $ 75 calls on PayPal Holdings, and short January 2022 $ 1,940 calls on Amazon. The Motley Fool has one Confidentiality Policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
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