After announcing its extraordinary fourth quarter results earlier in February, Alphabet, the parent organization of both YouTube and Google, also disclosed plans to declare a 20-for-one stock split later this summer.
The company had a tremendous fiscal 2021, seeing its stock rise 69% during the twelve months to the end of the calendar year. With news of an imminent stock split on the cards, investors are eyeing the firm now that its share price is trading close to the record $3,000 mark it achieved late last year.
And even though it shouldn’t affect the underlying fundamentals of Alphabet’s business, many companies often witness increased price performance after signaling their desire to press forward with a stock split. In fact, research by BofA Securities suggests that companies that do split their stock have gone on to gain an average of 25% in the next 12 months, compared to just 9% for the benchmark index.
So, is now a good time to buy GOOGL stock, or is the company’s valuation still too high to make it a viable investment?
The Bull Thesis
Alphabet is an absolute monster of a business. The firm is a category leader in both the online search and video sharing industries, with its Google Search Engine accounting for 86% of the sector market share, while its YouTube platform accounts for 76% of its respective space. In fact, the two websites – Google’s landing page and YouTube itself – are ranked the No. 1 and No. 2 most popular websites in the world.
And if that isn’t impressive enough, you need only look a little deeper into the company’s balance sheet to see the kind of numbers that the firm’s business operations generate. For instance, during its Q4 period, GOOGL’s revenue increased 32% year-on-year to $75.3 billion, and its earnings beat expectations by $3.39 to come in at $30.69 per share.
Even more interesting is Alphabet’s uncanny ability to grow its cash reserves. The company had just shy of $140 billion in cash and marketable securities as of Dec. 31, 2021, and, of the $257 billion in revenue it generated throughout 2021, it was able to turn $67 billion of that into free cash flow.
The company is also becoming more friendly to its shareholders now, with Ruth Porat, Alphabet’s Chief Financial Officer, saying that the business had repurchased $50 billion worth of stock throughout 2021.
There are also multiple growth drivers for GOOGL that will enhance its bottom-line in the coming years. Firstly, there’s its cloud computing segment, Google Cloud, which, though not as advanced as its Amazon and Microsoft rivals’ offerings, is still showing great promise.
Its revenue of $5.5 billion for the fourth quarter grew 45% year-on-year, and its deal volume increased 80% as well. Its deals worth over $1 billion also grew by 65%, and GOOGL’s company-wide backlog increase of 70% was mainly attributed to Google Cloud too.
While it remains to be seen whether Google can catch up with Amazon Web Services or Microsoft Azure, its hardware business appears to be doing just that. Alphabet is in the process of widening its range of new product devices, and attempting to take more of a market share for the ones it already has. In fact, Google recently overtook Amazon as the leading company for smart speaker shipments in the US, with a market share of 41.8% vs. Amazon’s 33.6%.
One big benefit for GOOGL of increasing its presence in the hardware space is the ability to generate subscription revenue off the back of its device sales. The halo effect is already working for Amazon and its own subscription services, and there’s plenty of room for Alphabet to do so too.
It already has 50 million users on its YouTube Music and its YouTube Premium platforms, and, given the 2 billion people visiting YouTube every year, there’s a a huge potential here for growth. And not only that, but subscription revenue is a highly sought after cash stream, since it promises recurring money flows and long-term opportunities.
At the moment, 80% of Google’s revenue comes from advertising, with only a tiny fraction of that made up of hardware sales. If this fraction can expand in time, that’s great news for Alphabet and its many shareholders.
The Bear Case
Google’s share price has performed exceptionally well since the start of the pandemic. The stock was up almost 200% at its recent high only a few months ago, and it has slipped little in the interim. The company appears to have come through unscathed from the vicious tech sell-off that afflicted many of its peers last year, with investors still bullish on the business’s near-term fortunes.
But whether this purple patch persists is another matter. Surviving the worst of any bear market is one thing, but surviving multiple successive bear markets is another – and this is where Alphabet might come unstuck. There are huge potential headwinds on the horizon, some of them “known knowns” – as Donald Rumsfeld might say – and some of them “known unknowns“.
The known knowns are going to be disruptive enough in themselves, with things like interest rate hikes, inflation, and the ongoing supply chain issues causing plenty of uncertainty in the short-term. In addition, there’s now a big known unknown in the form of the Ukraine-Russia affair. How this conflagration is going to pan out is anyone’s guess, but it’s clearly an unprecedented event which will drive market volatility for possibly years to come.
Furthermore, it goes without saying that Google had a boom-time during the coronavirus panic, for all the usual reasons that any other internet-based company did: increased e-commerce, online learning, stay-at-home orders driving more web activity etc.
But many of those pandemic tailwinds weren’t actually organic in nature; they were catalysts only because of the US government’s massive stimulus efforts, with not just $2.3 trillion handed out through the Consolidated Appropriations Act of 2021, but a further trillion dollars of student debt deferred over the last two years.
Without those continued injections of cash into consumer’s pockets, and the obstacles that now lay ahead, it isn’t at all guaranteed that GOOGL will continue to expand at the rate it has been doing recently. And if a couple of bad quarters show declining earnings growth, there’s a good chance investors will react negatively, taking the firm’s share price down with their pessimistic outlook.
Alphabet Stock Split: Conclusion
The case for buying Alphabet shares is pretty strong, regardless of whether it intends to split its stock or not. The only cause for concern would be some problematic macro headwinds, but in the aggregate this shouldn’t outweigh the positives. Overall, Google is still a buy, even at its current price.
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