Alphabet GOOGL, the parent company of Google, is one of the most innovative and dominant businesses in the world. The company has evolved from a single major business, search, into multiple major streams of revenue including Google Cloud services and YouTube.
After a decade and a half of near perfect performance, and empire building, Alphabet proved to be fallible. Over the last year GOOGL’s share price is down - 22% and it was down as much as -45% during the worst of the correction.
This big sell-off leaves GOOGL at an appealing level, and the company’s valuation is as compelling as it has been in the last decade. Alternatively, GOOGL faces continued regulatory scrutiny and litigation risk because of its Monopoly-like status.
Business Model
Alphabet reports total revenues under three distinct segments: Google Services, Google Cloud, and Other Bets. Services, which includes ads, Android, Chrome, hardware, Google Maps, Google Play, Search, and YouTube make up most revenues at 92.2%. Google Cloud, which includes Alphabet’s enterprise, infrastructure, data analytics, and collaboration tools makes up another 7.5%. While Other Bets is just 0.3% of revenue.
Alphabet’s primary business, ad sales, the majority of which come from search, is the company’s golden goose. The Google search engine is a monopoly, owning 94% of online search queries. As dominant as it is, it appears the Ads business is beginning to slow. As the broader economy slows so does business spending on ads. While the Google Services business grew 2.5% YoY in Q3, the second biggest contributor, YouTube, declined by 2.5%.
Challenges in the primary business are a stark contrast to the promise of Google Cloud. Q3 results showed that Cloud had increased revenues a stunning 38% YoY to $6.9 billion, making up nearly 10% of total sales.
Cloud services is an extremely competitive business between Google, Microsoft MSFT, and Amazon AMZN. On Tuesday evening Microsoft released its quarterly earnings report, including its cloud business results. The figure showed revenue growth from cloud decelerating to 31%. Additionally, in Q3 AMZN reported its AWS segment grew by 27.5%. Very commendable growth rates, but slower than their former growth which ranged from 47%-97% between 2017 and 2020.
The coming earnings report from GOOGL will be very interesting. Will GOOGL continue to gain market share and grow faster than MSFT and AMZN, or is the slowing economy going to hit Alphabet’s cloud revenues too?
Earnings Expectations
Considering the sluggishness of recent reports, expectations for the coming results are a bit sluggish. Q4 sales are expected to increase 2.1% to $63 billion, and FY22 sales are projected to grow 10.4% to $234 billion. Earnings are much weaker, with Q4 earnings expected to fall 23.5% to $1.17 per share, and the FY22 results to be down 16.6% to $4.68 per share.
Alphabet has joined the likes of Microsoft, Meta Platforms META, and Amazon in laying off a significant number of employees. GOOGL announced last week that they would be letting go of 12,000 workers. Particularly ugly are some of the stories I read on Twitter. The now former Google employees claimed they woke up and no longer had access to their Google issued tech. Then after checking their email learned of their new unemployed status. This included employees who had been with the company for 20 years.
These sudden, and quite drastic large-scale layoffs are indicative of where GOOGL and the other big tech companies are focused. After over expanding in the post Covid boom, prioritizing profitability is now front of mind.
GOOGL currently sports a Zacks Rank #3 (Hold), based on the shaky expectations of earnings. Earnings have been revised lower on all timeframes.
Antitrust
Fresh in the news, but not new to Alphabet is a recent Antitrust suit by the DOJ. On Tuesday, the DOJ announced they would be suing Alphabet to break up the ads business.
The Justice Department claims that Google abuses its ads marketplace, unfairly hurting publishers and advertisers, who are unable to use competing products. The lawsuit will be an effort to unwind some of Google’s acquisitions and break up the exchange.
This isn’t the first time Google has had to deal with an Antitrust case. This is the second time the DOJ has come after the internet giant in just two years. Additionally, Google has dealt with several large lawsuits in Europe.
Although Alphabet is well versed in these issues, it does pose an existential threat to the business. This kind of uncertainty can dissuade investors from GOOGL stock, and reasonably so.
Valuation
Alphabet stock is about as cheap as it has been in recent history. With a one year forward P/E of 19x it is nearly in-line with the S&P’s 18x. And on a relative basis, this is the cheapest the stock has been in fifteen years.
But with a deceleration in its primary business, and now mounting legal pressures, is it still appealing at this point?
Conclusion
Alphabet stock is in a peculiar spot. At one end, the valuation is extremely appealing, but on the other, growth in the primary business is slowing. Additionally, threats of breaking up the business are becoming very real.
With all that said, GOOGL is about as good as a business gets. For any long-term oriented investors, it is hard to pass on the stock where it stands currently. For traders, with a short-term perspective, there may be more volatility and downside over the next year or so.
This earnings report from GOOGL, and the rest of big tech should provide some very useful insight into the state of the economy as well as the businesses themselves. Traders and investors around the world will be very keen on these results.
Highest Returns for Any Asset Class
It’s not even close. Despite ups and downs, Bitcoin has been more profitable for investors than any other decentralized, borderless form of money.
No guarantees for the future, but in the past three presidential election years, Bitcoin’s returns were as follows: 2012 +272.4%, 2016 +161.1%, and 2020 +302.8%. Zacks predicts another significant surge in months to come.
Hurry, Download Special Report – It’s FREE >>
Alphabet GOOGL, the parent company of Google, is one of the most innovative and dominant businesses in the world. The company has evolved from a single major business, search, into multiple major streams of revenue including Google Cloud services and YouTube.
After a decade and a half of near perfect performance, and empire building, Alphabet proved to be fallible. Over the last year GOOGL’s share price is down - 22% and it was down as much as -45% during the worst of the correction.
This big sell-off leaves GOOGL at an appealing level, and the company’s valuation is as compelling as it has been in the last decade. Alternatively, GOOGL faces continued regulatory scrutiny and litigation risk because of its Monopoly-like status.
Business Model
Alphabet reports total revenues under three distinct segments: Google Services, Google Cloud, and Other Bets. Services, which includes ads, Android, Chrome, hardware, Google Maps, Google Play, Search, and YouTube make up most revenues at 92.2%. Google Cloud, which includes Alphabet’s enterprise, infrastructure, data analytics, and collaboration tools makes up another 7.5%. While Other Bets is just 0.3% of revenue.
Alphabet’s primary business, ad sales, the majority of which come from search, is the company’s golden goose. The Google search engine is a monopoly, owning 94% of online search queries. As dominant as it is, it appears the Ads business is beginning to slow. As the broader economy slows so does business spending on ads. While the Google Services business grew 2.5% YoY in Q3, the second biggest contributor, YouTube, declined by 2.5%.
Challenges in the primary business are a stark contrast to the promise of Google Cloud. Q3 results showed that Cloud had increased revenues a stunning 38% YoY to $6.9 billion, making up nearly 10% of total sales.
Cloud services is an extremely competitive business between Google, Microsoft MSFT, and Amazon AMZN. On Tuesday evening Microsoft released its quarterly earnings report, including its cloud business results. The figure showed revenue growth from cloud decelerating to 31%. Additionally, in Q3 AMZN reported its AWS segment grew by 27.5%. Very commendable growth rates, but slower than their former growth which ranged from 47%-97% between 2017 and 2020.
The coming earnings report from GOOGL will be very interesting. Will GOOGL continue to gain market share and grow faster than MSFT and AMZN, or is the slowing economy going to hit Alphabet’s cloud revenues too?
Earnings Expectations
Considering the sluggishness of recent reports, expectations for the coming results are a bit sluggish. Q4 sales are expected to increase 2.1% to $63 billion, and FY22 sales are projected to grow 10.4% to $234 billion. Earnings are much weaker, with Q4 earnings expected to fall 23.5% to $1.17 per share, and the FY22 results to be down 16.6% to $4.68 per share.
Alphabet has joined the likes of Microsoft, Meta Platforms META, and Amazon in laying off a significant number of employees. GOOGL announced last week that they would be letting go of 12,000 workers. Particularly ugly are some of the stories I read on Twitter. The now former Google employees claimed they woke up and no longer had access to their Google issued tech. Then after checking their email learned of their new unemployed status. This included employees who had been with the company for 20 years.
These sudden, and quite drastic large-scale layoffs are indicative of where GOOGL and the other big tech companies are focused. After over expanding in the post Covid boom, prioritizing profitability is now front of mind.
GOOGL currently sports a Zacks Rank #3 (Hold), based on the shaky expectations of earnings. Earnings have been revised lower on all timeframes.
Antitrust
Fresh in the news, but not new to Alphabet is a recent Antitrust suit by the DOJ. On Tuesday, the DOJ announced they would be suing Alphabet to break up the ads business.
The Justice Department claims that Google abuses its ads marketplace, unfairly hurting publishers and advertisers, who are unable to use competing products. The lawsuit will be an effort to unwind some of Google’s acquisitions and break up the exchange.
This isn’t the first time Google has had to deal with an Antitrust case. This is the second time the DOJ has come after the internet giant in just two years. Additionally, Google has dealt with several large lawsuits in Europe.
Although Alphabet is well versed in these issues, it does pose an existential threat to the business. This kind of uncertainty can dissuade investors from GOOGL stock, and reasonably so.
Valuation
Alphabet stock is about as cheap as it has been in recent history. With a one year forward P/E of 19x it is nearly in-line with the S&P’s 18x. And on a relative basis, this is the cheapest the stock has been in fifteen years.
But with a deceleration in its primary business, and now mounting legal pressures, is it still appealing at this point?
Conclusion
Alphabet stock is in a peculiar spot. At one end, the valuation is extremely appealing, but on the other, growth in the primary business is slowing. Additionally, threats of breaking up the business are becoming very real.
With all that said, GOOGL is about as good as a business gets. For any long-term oriented investors, it is hard to pass on the stock where it stands currently. For traders, with a short-term perspective, there may be more volatility and downside over the next year or so.
This earnings report from GOOGL, and the rest of big tech should provide some very useful insight into the state of the economy as well as the businesses themselves. Traders and investors around the world will be very keen on these results.
Highest Returns for Any Asset Class
It’s not even close. Despite ups and downs, Bitcoin has been more profitable for investors than any other decentralized, borderless form of money.
No guarantees for the future, but in the past three presidential election years, Bitcoin’s returns were as follows: 2012 +272.4%, 2016 +161.1%, and 2020 +302.8%. Zacks predicts another significant surge in months to come.
Hurry, Download Special Report – It’s FREE >>
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