Alphabet Inc. (NASDAQ:GOOG) (NASDAQ:GOOGL) was one of the chief beneficiaries of the coronavirus pandemic. Homebound consumers turned to their computers, and the use of YouTube and Google’s search engine increased markedly.
However, COVID is largely in the past, and tough comps, as well as increased competition from YouTube’s rival, TikTok, have some investors concerned.
In fact, management warned of a tough comp for the next quarter. And yet, the company is still recording double digit growth. Furthermore, investors have an upcoming stock split, Google Cloud, which is growing rapidly yet is still losing money, and a variety of potential businesses in the Other Bets segment to consider.
Reviewing 1Q22 Results
Alphabet reported 1Q22 results on April 26. The company missed on the top and bottom lines, reporting EPS of $24.62 per share versus consensus of $25.91, and revenue of $68.01 billion, $100 million below analysts’ estimates.
Advertising revenue hit $54.66 billion, an increase from $44.68 billion the year prior.
The biggest sore spot in earnings was YouTube. Even so, YouTube advertising grew by 14% year over year. Analysts expected $7.51 billion in advertising revenue from that division; however, YouTube only delivered $6.87 billion. Suspension of services in Russia contributed to the miss.
However, Google Cloud revenue stood at $5.82 billion, ahead of the $5.76 billion expected for the quarter.
Growth in cloud increased by 43% from Q1 of last fiscal year. The operating loss for the cloud division was $931 million, a decrease from the $974 million loss reported a year earlier. Google Cloud now provides 8.5% of Alphabet’s total revenue.
The reported sales constituted a 23% year over year growth, well below the 34% growth rate in Q121.
Alphabet’s Other Bets boosted revenue from the year prior to $440 million from $198 million. However, that division’s loss increased slightly to $1.15 billion.
Management stressed the difficult comparisons with 2021, when consumers were affected by coronavirus restrictions, and noted the increased competition from TikTok. They also expect a tougher comparison in the upcoming quarter, with negative currency effects serving as a headwind.
What To Know About Google’s Past And Upcoming Stock Split
Google plans a 20-for-1 stock split that will take effect on July 15. Investors in the company’s Class A, Class B, and Class C stock will receive 19 additional shares for each share of the same class of stock they own on the day of the split.
Google’s history includes two previous stock splits; however, the first was a bit of an anomaly and has been referred to as the most controversial stock split ever. That is because the primary purpose of that split was to create a new classification of stock with reduced voting privileges.
That split occurred on March 27, 2014, when Google issued stock to create class C shares. Class A were the only shares publicly available prior to the split.
The stock experienced a slight price increase following the split. The shares traded for around $557 in March and peaked near $580 in September. However, in March of the following year, the stock was a bit below the pre-split price.
The company initiated a second, conventional split on April 27, 2015. The stock traded for an average of about $693 a share in the month before the split occurred. By July, it was near $770, and within a year, GOOG traded for over $900.
Will Google’s Stock Price Go Up After The Split?
It should go without saying that there are a variety of factors that can drive a company’s share price following a stock split. However, there are a number of studies that indicate that share prices tend to climb following stock splits.
A study involving nearly 1,300 companies’ stock splits, conducted by David Ikenberry of Rice University, determined that shares of companies following splits performed 8% better than similar firms after one year, and outperformed by 16% after three years.
Studies by other researchers buttress Professor Ikenberry’s findings.
Although stock splits seem to be purely cosmetic, there is ample empirical evidence that they are associated with abnormal returns.
From a research paper by Tak Yan Leungb, Oliver Meng Ruic and Steven Shuye Wang
Furthermore, another catalyst could drive Google stock higher following the split. There is speculation that Alphabet might be added to the Dow Jones Industrials. To date, the company is excluded from the Dow.
That is because the Dow Jones is a price-weighted index. Therefore, the index requires listed stocks to have similar share prices, otherwise one name could have a disproportionate weight among the small list of stocks. The lower share price that will prevail after the split would allow GOOG to join the DOW.
If Google is added, this would prompt some ETFs that mirror the index to include the stock in their holdings.
Why Google Should Experience Additional Growth
Google Cloud should provide a significant revenue stream in the foreseeable future. To date, the cloud division has been losing money, but that is largely due to management investing heavily in the space.
Google Clouds percentage of revenue growth rates exceed that of AWS and Azure by wide margins, and Google now commands 10% of the global market.
When one studies prior results, it appears as if the company is reaching an inflection point with the cloud.
In FY 2018, Google Cloud reported an operating loss of $4.3 billion, followed by losses of $4.6 billion and $5.6 billion in 2019 and 2020, respectively. However, in 2021, the operating loss was narrowed to $3.1 billion.
At the same time, revenues from Google Cloud were increasing markedly, from $8.9 billion in 2019, to $13 billion in 2020 and just over $19 billion in 2021. In the latest quarter alone, cloud reported $5.8 billion in revenue.
For the full year 2021, compared with the full year 2020, we saw over 80% growth in total deal volume for Google Cloud Platform and over 65% growth in the number of deals over $1 billion.
Sundar Pichai, CEO
Grandview Research forecasts a CAGR of 15.7% for the cloud market from 2022 to 2030. This would increase the current market by 272%.
The digital advertising market is also expected to grow at a rapid rate. With roughly 92% of the worldwide search engine market, Google has an inside track at garnering the globe’s digital ad spend. Consequently, today the company holds nearly a 29% share of the digital ad market.
According to a report by Zenith, digital will constitute over 60% of ad spend in 2022, and rise to over 65% of all advertising in 2024. That firm forecasts the total advertising market will grow from $705 billion in 2020 to $873 billion in 2024.
The US market will provide the lion’s share of the growth in digital advertising.
Less sure but tantalizing prospects for growth lie in Alphabet’s Other Bets segment.
Like Google Cloud, that division operates at a loss. However, unlike the cloud business, the path to profits for the “moon shots,” are less certain and will undoubtedly take longer to bring to fruition.
Waymo is the most likely candidate for eventually providing robust growth.
Launched in 2018, Waymo is a driverless ride hailing service. Initially operated with a safety operator in the driver’s seat, the company announced it is transitioning to a truly driverless experience.
Brian Nowak, an analyst for Morgan Stanley, estimates Waymo’s potential valuation at $105 billion, while Eric Sheridan of UBS forecasts $114 billion in revenue for Waymo in 2030. Sheridan’s estimate is for Waymo’s taxi service alone. He also sees additional possibilities for a revenue stream from logistics and commercial delivery as well.
In addition to Waymo, Alphabet also has subsidiaries dedicated to research in human aging, artificial intelligence, drug discovery, smart homes technology, robotics, and quantum computer development.
Is Google Stock Undervalued?
GOOG currently trades for $2,261.68 per share. The average 12-month price target of the 30 analysts covering the stock is $3,323.07. The average price target of the five analysts that rated the stock following the last earnings report is $3,174.
Seeking Alpha and Yahoo provide forward P/E ratios of approximately 20.5x. This is well below the average yearly P/E over the last five years of 28.18x.
SA estimates the 5-year PEG at 0.99x, while Yahoo provides a 5-year PEG of 0.83x. Both of those fall well below the average PEG over the last five years of 1.52x.
Is Google Stock A Buy, Sell, or Hold?
Google has been and remains a growth stock. To illustrate the rapid rate of increase the company generates, consider Alphabet’s reported revenue in the first quarter of each of the last four fiscal years.
In Q1 2019, total company revenues were $36.3 billion. That was followed in Q1 2020 with $41.1 billion, and then $55.3 billion in Q121, and $68 billion last quarter.
That means the company experienced a higher growth rate from 2021 to 2022 than from 2019 to 2020.
Google will continue to benefit from the secular trend towards increased use of digital advertising, and Google Cloud will likely turn a profit in the not-too-distant future.
Meanwhile, it is reasonable to believe that Waymo will eventually generate a revenue stream, making the moon shots segment a profitable endeavor.
I weigh Google’s forward P/E ratio of 20.56x, and I have to look askance at the valuation metrics of Coca-Cola (KO) (26.32x), PepsiCo (PEP) (20.34x) and Procter & Gamble (PG) (26.70x).
I then consider Google’s 5-year PEG ratio, which is below 1x with that of KO, at 3.44x, PEP at 3.58x, and PG with a 4.39x 5-year PEG.
I admit that I often struggle determining whether to assign a buy or hold rating for the stocks I cover. However, when I consider the growth prospects for GOOG, and especially when I compare the valuation metrics I cited above with other prominent companies, I find it easy to arrive at a rating decision.
Google stock is a BUY.