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Alphabet Stock: Tech Giant Carries Plenty of Strengths

I am bullish on Alphabet (GOOGL) as the company’s powerful moat, innovative strength, and reasonable valuation make it a compelling stock.

Alphabet is an American multinational technology company that was formed when Google restructured itself and made itself a subsidiary of Alphabet. The two co-founders, Larry Page and Sergey Brin, remained onboard as employees, board members, and controlling shareholders at Alphabet.

Strengths

Alphabet is the world’s largest technological corporation in terms of revenue, and one of the Big Five companies that are the most valuable in the world.

Google is the world’s most popular search engine by far, and is the platform that 70% of the world’s Internet users go to for answers to their queries.

The company’s main revenue source is Google’s Ad business that was responsible for an estimated 80.5% of Alphabet’s total revenue in 2020. In addition, Google has also developed a wide range of apps and programs, including the Android operating system that is used by more than half of the world’s smartphones. It also offers GSuite and Google Drive and is the owner of YouTube as well — the largest video-sharing network in the world.

Recent Results

Alphabet reported revenue (minus traffic acquisition cost) of $53.62 billion in its third quarter of 2021 report. The revenue exceeded expectations of $52.62 billion, and showed a 41% year-over-year growth from the $38.01 billion revenue generated in the third quarter of 2020.

The company’s earnings were calculated at $27.99 per share, which beat analysts’ expectations of $23.50.

The company attributes its top-line growth to its Search business unit, which saw a growth of 44% and brought in $37.9 billion in revenue in the third quarter of 2021. Alphabet also saw rapid growth in many of its other business units.

The company’s YouTube ad sales saw a growth of 43%, generating $7.2 billion revenue from the platform alone. Google Cloud, which is a competitor to leading cloud computing spaces like Amazon Web Service and Microsoft Azure and owns 8% of the market share in the cloud industry, generated revenue of $5 billion, beating expectations and showing a growth of 44.9% from the previous quarter.

Alphabet has been the best performer among the FAANG companies during the third quarter of 2021 and analysts expect it to capitalize on the reopening trade since it will benefit from travel-related search queries and ads on its search engine.

Valuation Metrics

Alphabet’s stock looks reasonably valued right now as its EV-to-forward EBITDA ratio is 16.3x compared to its five-year average of 13.2x, and its price-to-forward free cash flow ratio is 27.6x compared to its five-year average of 25.8x.

Wall Street’s Take

From Wall Street analysts, Alphabet earns a Strong Buy analyst consensus based on 25 Buy ratings, two Hold ratings, and zero Sell ratings in the past three months. The average Alphabet price target of $3,328.08 puts the upside potential at 10.9%.

Summary and Conclusions

Alphabet is a very powerful technology company thanks to its dominant position among Internet search engines via its Google search platform, media content via its YouTube platform, and it also possesses several other business lines that generate growing revenue.

It has a stellar balance sheet as well and – given the strength of its employee brain trust – should be able to generate strong growth for years to come.

Meanwhile, the stock price remains reasonable and Wall Street analysts are overwhelmingly bullish on it at current prices. As a result, it might be a good time to consider adding shares.

Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.

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