3 reasons to buy Alphabet shares before they split
Alphabet (NASDAQ:GOOG) has proven quarter after quarter why it is one of the best companies on Earth. Search engine Google, YouTube and parent company Google Cloud have a market capitalization of nearly $2 trillion, making them the third largest company in the United States.
In its fourth quarter earnings report released on February 1, Alphabet reported staggering revenue of $75 billion for the quarter and $257 billion for the full year. These staggering numbers become even crazier when quarterly growth rates of 32% and annual growth rates of 41% are taken into account.
Yet these fantastic results were overshadowed by management’s announcement to split the title 20 for one. The nearly $3,000 stock will begin trading for around $150 after the July 4 holiday in 2022. Although a stock split does not affect the company, stocks often do well after the announcement of a split – just watch You’re here‘sand Apple‘s performances in August 2020 after each company announced a split.
Despite this potential catalyst, I think there are three stronger reasons why investors should consider buying stocks now.
1. Cash stocks and generation
As of December 31, 2021, Alphabet had $139.6 billion in cash and marketable securities on its balance sheet and just $14.9 billion in debt. Having a War Chest sitting allows Alphabet to buy anything he wants. During his Q4 conference call, CEO Sundar Pichai mentioned that he was considering a blockchain solution for Web3 (which could power the metaverse). Alphabet can go out and find a company to fulfill that desire – and can make it happen with its resources.
If Alphabet lost even half of its cash in an acquisition, investors shouldn’t be afraid; Alphabet will just generate more next year. Throughout 2021, Alphabet converted $67 billion of its $257 billion in revenue into free cash flow. If it doesn’t spend its money on acquisitions, management can repurchase more shares — it repurchased $50 billion throughout 2021. Regardless of what management decides, Alphabet’s cash and generation make it a fantastic investment.
2. The sun begins to shine through the Google Cloud
In the battle for cloud computing supremacy, Google did not win Amazon Web services and Microsoft Azure tracks. However, Google Cloud is far from a lackluster segment. During the fourth quarter, its quarterly revenue grew 45% year-over-year to $5.5 billion and grew 47% through 2021. While Google Cloud has still lost $890 million, much of it can be attributed to costs associated with server infrastructure expansion, which shows that Alphabet hasn’t given up on its cloud offering.
While Google Cloud may never outpace Azure or AWS, the deals Alphabet struck in the fourth quarter should give investors hope. Management cited “a backlog growing 70% to $51 billion, most of which can be attributed to Google Cloud” during its fourth quarter conference call. Additionally, it saw an 80% growth in transaction volume and a 65% increase in transactions over $1 billion. Google Cloud is gaining momentum and investors should consider owning Alphabet shares because of it.
3. Google and YouTube are the leaders in their category
Alphabet owns two companies with insane market share in their respective categories.
|Google search engine||86%|
Due to their dominance, advertisers spend heavily on these platforms.
|Segment||4th quarter 2021 revenue||Annual growth|
|Google Search||$43.3 billion||36%|
|YouTube Ads||$8.6 billion||25%|
In total, Alphabet’s advertising segment brought in $61.2 billion and grew 33% with the addition of its Google Network division. Those numbers outpace the revenue suppressed by COVID in 2020, and the growth numbers won’t be nearly as impressive throughout 2022. But advertising isn’t going away anytime soon. .
Combined with its “Google others” segment, its services division achieved an operating margin of 37% and remained the only profitable segment within Alphabet. Ads keep the lights on at Alphabet headquarters, and with two premium ad platforms, investors should have confidence in the future of both segments.
Alphabet is trading at an attractive price of 26 times earnings, which isn’t too shabby for a company with 32% revenue growth.
The title is not near its peak of valuation, even if it is close to reaching all-time highs. And that should allay fears of buying a stock at inflated valuations, as 26x earnings is far from expensive for the company.
Alphabet is a solid buy, regardless of how investors view the stock. Those who hold the stock for three to five years will reap the benefits of a stock split, potential stock buybacks, an acquisition or two, and plenty of cash generated. Alphabet is an obvious stock. Even though it’s near its all-time high, investors from all walks of life could find a place for Alphabet in their portfolios.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.