Google’s parent company Alphabet Inc (NASDAQ:GOOGL) is one of the most valuable and successful companies in the world. It’s an advertising juggernaut that owns a large portion of online search. The company is worth over $1.5 trillion and is poised to keep growing, but how high can Google go?
Alphabet turned in great earnings reports over the past year despite early skepticism that advertising companies would suffer from pullbacks in ad budgets. But the virtual-first society built by widespread global stay-at-home orders favored the footprint this tech giant had already built.
The Alphabet holding company owns much more than just Google too – its subsidiaries and assets include Waymo, YouTube, DeepMind, and Verily. It’s also deeply involved in Android’s development and focuses heavily on researching new innovations that can evolve humanity and society through technology. With so many assets under its umbrella, this juggernaut is set to forge a path higher over time, but by how much?
Google Margins & Growth Explain Google Share Price
Alphabet’s net profit margin as of mid-2021 is 26.11 percent, which is the difference between its revenue and overhead operating expenses. This is a big rise from its operating margin of 19 percent in the first quarter of 2020.
The company’s share price is about 30 times its revenue. For such a large company this multiple would ordinarily be surprising but the growth rate of Google has barely slowed in almost two decades, and investors price that in.
Companies like Alphabet and Amazon (AMZN) are still compounding growth at rates that would be the envy of many much smaller companies. In short, the high price to sales multiple does not mean the company is overvalued by any stretch.
The company is deeply engrained in cloud-based technology, and it still holds around 90 percent of the overall internet search market, according to Stat Counter. It is a dominant force in productivity software, cloud-based storage, and more. And the company has deep pockets to acquire whatever it needs.
It holds over $319 billion in total assets, which includes over $136 billion in cash and cash equivalents. This liquidity means it can overcome any financial hurdles impeding its growth. But will it be enough to keep revenues rising?
Will Google Top Line Keep Rising?
Google’s revenues dipped from 2019 to 2020 but signs point to a resumption of growth over the coming few years. According to Statista, this year’s USA revenues are primed to come in at $47 billion while next year’s figures are forecast to reach $53 billion.
The reality is even though ad budgets may have been reduced to some extent in 2020, business has returned with gusto this year and Google benefits from higher consumption of videos on YouTube when stay-at-home orders are in effect too.
All that should translate into higher earnings too.
Will Google Earnings Go Up?
Although it lost revenues, Alphabet adjusted to the environment by cutting operating costs and increasing its operating margins. For the end of the 2019 calendar year, it had a 20 percent operating margin, which increased to 28 percent by the end of 2020.
This increased the net income and diluted EPS accordingly. That means the company can continue boosting earnings if it can find ways to push for cheaper operating costs. This includes initiatives like paying employees to move to cities with cheaper costs of living.
If Google can continue leveraging a cheaper distributing workforce while still maintaining its focus, it can grow margins. In doing so, its earnings will continue to go up.
The marginal cost of an extra click is so low for Google that as internet traffic as a whole grows so too do top and bottom line figures because Google AdSense and YouTube views grow too.
Is Google Stock Undervalued?
It seems hard to believe that Google could be considered undervalued but a discounted cash flow forecast does reveal a fair market value of $2,599 per share.
As a $1.5 trillion juggernaut, it’s a market leader in a lot of segments, and it already showed massive year-over-year growth in 2020. There are several segments that should continue growing revenues.
YouTube is one of the most-visited sites on the planet, and it’s a popular app in every app store and ecosystem. Google Cloud is continuing to grow, despite competition from Amazon and Microsoft (MSFT). It’s investing in more analytics and collaboration tools to make it more accessible for remote teams to adopt.
This should help it continue to grow, but there are obstacles in the way.
AMZN, MSFT & Government Are Only Serious Threats
Google faces stiff competition from enterprise commerce giants Amazon and Microsoft (MSFT). Those aren’t the only big or small rivals either – the company has competition in every direction, and that includes the government.
Alphabet, Amazon, and Facebook are among the biggest targets for regional antitrust movement. Governments in Europe, Australia, and the United States are seeking to break these companies into smaller segments, and there’s a possibility Google becomes separated from Alphabet.
That could be a boon to investors though, as the country’s first billionaire was created from the Standard Oil antitrust breakup. Only time will tell how this works out.
How High Can Google Go?
Google is a massive company with a large tech footprint. It is the leading search engine and online advertising platform, and it’s growing its productivity and collaboration tool suites. This has analysts forecasting it will grow in the long run as high as $2,599 per share.
But there are obstacles in the way – governments in the U.S. and other countries around the world are hoping to break it up. With smaller tech companies popping up and big government trying to crack down, Google has to work hard to maintain its pace.
It has the resources and cash to do so though, and its cash balance alone are worth more than most companies. Whatever it doesn’t have, it can buy, and if it’s broken up for antitrust, investors should win anyway.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.