Is Google Stock A Buy?

Google

(Investor’s Business Daily)

Heading into 2021, investors in Google stock can look forward to a rebound in the internet search and YouTube advertising businesses. There’s also more disclosure coming for Google’s cloud computing business, which parent Alphabet (GOOGL) will break out as a separate segment starting with December quarter results.

Then, there’s the ongoing stock repurchase program, which will help boost earnings for GOOGL stock. Still, there are wild cards that figure in valuation for Google stock. One is the Waymo autonomous vehicle business.

Amid the coronavirus pandemic, the performance of Google stock lagged Apple (AAPL), Amazon.com (AMZN), and Facebook (FB) in 2020. But 2021 could be a different story.

The Department of Justice on Oct. 20 filed an antitrust lawsuit against Google, charging it has harmed competition and consumers by monopolizing internet search and search-related advertising.

Due to its huge cash holdings, GOOGL stock has shrugged off three fines totaling $9.3 billion levied by the European Union on antitrust grounds. The Justice Department, though, could force Google to restructure if it wins in court. A legal battle with the DOJ likely will drag on for years.

In the third quarter, Google bought $7.9 billion of its own shares vs. $6.9 billion in the June quarter and $8.5 billion in the March quarter.

Most investors still know the company as Google, even though the internet search giant reorganized as holding company Alphabet in 2015. The restructuring move separated Google’s core internet advertising business from so-called moonshots, such as autonomous vehicles.

Under new Alphabet Chief Executive Sundar Pichai, the transparency issue bugging Google stock for years could be going away.

Google Stock: More Transparency A Plus
Google stock’s strength in artificial intelligence spans digital advertising, the Google Cloud Platform, YouTube and consumer hardware products. GOOGL stock is just one artificial intelligence stock to watch.

Google still dominates in digital advertising, along with Facebook. While Google has expanded into cloud computing and consumer hardware, digital advertising still makes up the lion’s share of revenue.

With Amazon gaining ground in digital advertising, Google recently made a big change in how it handles e-commerce listings.

In December, 2019, Google co-founder Larry Page stepped down as Alphabet’s chief executive. Pichai, the CEO of the Google unit, replaced him. Google co-founder Sergey Brin stepped down as Alphabet’s president.

Google’s profit margins remain an issue amid high investments in data centers for cloud computing, artificial intelligence, YouTube and consumer products.

Meanwhile, Google has struggled to gain share in cloud-computing services vs. Amazon and Microsoft (MSFT).

Bank of America forecasts that YouTube’s subscription business will reach $18 billion in revenue by 2025, up from $5 billion in 2020. In addition, YouTube is benefiting as major brands shift ad budgets from linear TV to digital channels.

YouTube has over 30 million music and premium paid subscribers and YouTube TV has more than 3 million subscribers, Google said on its Q3 earnings call.

GOOGL Stock: Fundamental Analysis
In the September quarter, Google earnings rose 24% from a year earlier to $14.37 a share. Google has cut back on hiring, marketing and capital spending amid the Covid-19 emergency. Revenue rose 14% to $46.17 billion.

Google Properties revenue — which includes core internet search, the Play store and YouTube — rose 10% to $31.38 billion, topping estimates.

Cloud revenue climbed 45% to $3.44 billion vs. analyst estimates of $3.29 billion. Cloud revenue rose 43% in the June quarter and 52% in the March quarter.

Google said it plans to disclose cloud profitability for the first time when it reports December-quarter earnings.

Additionally, YouTube advertising revenue rose 32% to $5.04 billion vs. estimates of $4.37 billion.

Key Financial Metrics For Google Stock
In early 2018, Google changed accounting methods. It switched to reporting GAAP earnings, or generally accepted accounting principles. GAAP earnings include stock-based compensation.

One closely watched financial metric relates to Google’s traffic acquisition costs. TAC has been rising as Google relies more on Apple and partner sites to generate mobile advertising revenue.

In the September quarter, Google reported net revenue — minus TAC — of $38.01 billion, topping estimates of $35.35 billion.

TAC rose 9% in Q3 to $8.12 billion vs. estimates of $7.61 billion.

Waymo Autonomous Vehicle Business
A key question for investors is how much should self-driving-car project Waymo and “Other Bets” such as the Verily Life Sciences unit figure into valuation.

In early 2018, some analysts projected Waymo’s long-term valuation in a range of anywhere from $75 billion to $125 billion. Expectations for autonomous vehicles, though, have been lowered recently.

Waymo in early March raised $2.25 billion in funding from outside investors including private equity firm Silver Lake, the Canada Pension Plan Investment Board and Abu Dhabi’s Mubadala investment arm.

While Google did not disclose Waymo’s valuation in the funding round, reports said it was only $30 billion.

In a big development, Waymo Chief Executive John Krafcik on Oct. 8 announced that Waymo would be opening up a fully driverless ridesharing service in suburban parts of Phoenix, Ariz., to the public. The company had used human supervisors previously.

Google Stock: Pixel 5G Mobile Phones
Another question is the performance of Google’s hardware business. It’s battling Apple in smartphones and Amazon in smart-home appliances.

In September, Google rolled out new Pixel smartphones that support 5G wireless services. Apple rolled out 5G iPhones on Oct. 13.

With the Android mobile operating system built into devices sold worldwide, revenue growth from the Play Store continues to be a bright spot. However, the app service fees that Apple and Google collect face more regulatory scrutiny.

In addition, Google’s new cloud gaming service, Stadia, launched in late 2019.

Also, Google in late 2029 agreed to buy smartwatch maker Fitbit for $2.1 billion. The purchase could help Google make a push into the health and fitness market, analysts say. The deal has not closed.

GOOGL Stock: More Cloud Acquisitions Coming?
Google’s cloud computing business, meanwhile, lags rivals Amazon and Microsoft. Google brought in Thomas Kurian, a former Oracle (ORCL) executive, to improve performance in the corporate market. Bulls say Google Cloud Platform is beginning to take share as it focuses on security, open source software and data analytics.

Baird forecasts that the Google cloud computing business in 2021 will grow 44% to $19 billion in revenue.

Google in June, 2019 purchased data analytics firm Looker for $2.6 billion in cash. Santa Cruz, Calif.-based Looker’s analytics platform uses business intelligence and data visualization tools. More acquisitions to boost Google’s cloud business could be coming, analysts say.

Alphabet is one of the closely-watched FANG stocks. The other FANG stocks include Facebook, Amazon and Netflix (NFLX).

While GOOGL stock holds a $1.2 trillion dollar market cap, Apple and Amazon both hold much bigger valuations.

Further, Google’s Relative Strength Rating is only 78 out of a possible 99, according to IBD Stock Checkup. Also, the best stocks tend to have an RS rating of 80 or better.

In addition, Google stock owns an Accumulation/Distribution Rating of B-plus. That rating analyzes price and volume changes in a stock over the past 13 weeks of trading.

The rating, on an A+ to E scale, measures institutional buying and selling in a stock. A+ signifies heavy institutional buying; E means heavy selling. Think of the C grade as neutral.

In addition, Google stock popped Oct. 30 after Alphabet posted September-quarter results.

With the rally, Google stock moved above a new entry point of 1,726.20, according to IBD MarketSmith analysis. GOOGL stock has consolidated just above the 1,726.20 entry point. As of Dec. 4, Google stock straddles a 5% buy zone.

Some argue that Google stock is long past the glory days when it gained nearly 800% in little more than three years after its initial public offering. In recent years, Google stock typically keeps pace with the S&P 500, punctuated by brief periods of outperformance.

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