The Bull Case For Google Stock

Alphabet, parent to Google (GOOG), announced its second-quarter earnings on July 27, 2021, and the results were stunning. After posting its first-ever drop in revenue just one year ago, the company is back on top with total revenues of $61.88 billion. That’s a 62 percent year-over-year increase.

With a market cap of more than $1.8 billion and share prices in excess of $2,700, some investors and analysts question Alphabet/Google’s future. They see an overvalued tech company that can’t keep growing forever. However, the majority of market experts disagree with naysayers’ bear arguments. A look at the second-quarter earnings report makes a compelling bull case for Google stock. 

Big Wins for the Google Community 

Google and parent company Alphabet might be in business to turn a profit, but the company prides itself on providing tools and services that support the success of individuals and business partners. For example, second-quarter 2021 broke new records for publisher partners’ earnings through the platform, and YouTube creators earned more during this period than ever before. 

In addition to these wins, Google was instrumental in facilitating billions of connections between individuals and businesses throughout the quarter. That includes everything from giving directions and making voice calls possible to ordering food and making reservations. This activity is critical to driving revenue for businesses around the world, and Google considers itself a key contributor to returning the economy to full health. 

Finally, Alphabet leadership noted that the past year broke new records in terms of sending traffic to third-party websites. That type of activity is a win for both Google and the partners it supports. 

Alphabet Wins Its AI Bet 

Today, it’s obvious that artificial intelligence (AI) will be a critical force behind the technology of the future. However, a few years ago, investing in AI wasn’t quite as clear-cut. Nonetheless, Alphabet took a risk and devoted substantial resources to AI development. The company was confident that AI technology could enhance its products and services in a way that was unmatched by any other emerging technology. 

Fast forward to the present, and it is plain to see that Alphabet’s bet on AI was a brilliant move. In May, the company announced a number of new AI-based features that will significantly strengthen its already powerful product line. 

For example, the launch of Multitask Unified Models (MUM) will transform search capabilities. It is 1,000 times more powerful than the already powerful search technology, and it can learn and transfer knowledge across dozens of languages. In other words, MUM can gather information in one language, then deliver it to users in another language. 

Alphabet also shared news of a new AI-driven natural conversation system called Lambda. That’s a big deal, as development of natural conversation technology has been fraught with challenges. While Lambda isn’t ready for deployment quite yet, the early stages demonstrate far more success than previous attempts have achieved.  

Perhaps the most exciting news from Alphabet is the AlphaFold Protein Structure Database. This platform offers researchers access to more than twice the number of high accuracy human protein structures than were previously available.

The company’s goal is to complete the database with nearly every sequence protein that is currently known, which will dramatically increase scientists’ ability to move forward with research that could transform human health and wellness outcomes.

Android Still Beats Apple 

In the United States, Apple’s iOS smartphones are more popular than those operating on the Android system. As of first quarter 2021, iOS held about 60 percent of US market share, with Android trailing behind at around 40 percent.

However, Apple’s dominance is limited to the US. On a global level, Android is far more popular. Android holds approximately 72 percent of the global market share, with Apple trailing behind at roughly 27 percent.

Despite its impressive lead, Alphabet isn’t slacking when it comes to Android improvements. During the second quarter, the company shared details on the updated Android 12 operating system. It offers users new methods of personalizing their mobile devices, along with dramatic improvements in power efficiency and speed.

The newest Android software has custom privacy protections built right in, which has proven to be a hot topic among consumers in the current environment. 

The YouTube Revolution  

YouTube has always been a somewhat extraordinary phenomenon. What started as an opportunity for average people to create and share videos is now one of the most powerful self-marketing platforms available. 

Retailers leverage YouTube to increase their digital presence and build their brand, because they are able to reach audiences that they can’t otherwise connect with. A study by Nielsen determined that in 2019 and 2020, 70 percent of those who viewed advertising on YouTube were not available to consume the same advertising through other common channels like television.

The unique impact of YouTube marketing has made it a must-have component of any larger marketing strategy. That, of course, means better performance for Alphabet/Google stock. 

Events & Trends Building Alphabet’s Momentum 

AI, Android, and YouTube might be top-of-mind for Alphabet executives, but the company’s successes don’t stop there. Alphabet is seeing solid results from its FitBit health tracker products, as well as the family of Nest SmartHome products. 

In addition to all of that, Google Play is delivering strong results, particularly in terms of generating income for developers. Total payments from inception through the second quarter of 2021 top $120 billion. 

Finally, Google Cloud revenues are trending ever-higher, delivering a 54 percent increase year-over-year. That is primarily a result of new clients who have selected Google Cloud as host during their transition to digital. Examples of high-profile Google Cloud users include Whirlpool, Johnson Controls, and PayPal.  

The Bull Case for Google Stock: What’s Next?

Leadership wasn’t quite ready to give formal guidance on short-term expectations for Alphabet/Google’s performance. That is due, in part, to the ongoing uncertainty presented by COVID-19. 

The company had a rocky second quarter in 2020 when large swaths of the global economy shut down. While there is now an effective vaccine for the novel coronavirus, increasing cases driven by the highly contagious Delta variant make the next six-to-twelve months unpredictable. 

With that said, management was willing to express cautious optimism about Google Services’ near-term prospects, as well as Cloud Services’ prospects. The expectation is that revenue will continue to grow in both businesses, though when and how much will depend on COVID-related developments in the coming months. 

Google Play may struggle a bit to deliver significant year-over-year gains in the coming quarters, because these quarters will be compared to the unusually strong gains in the second half of 2020. In addition, the company has changed the Play fee structure effective July 1st, which will have an impact on revenues. 

Short-term expectations aside, there is no doubt that Google stock is a buy. It is an industry leader on multiple fronts, and that means a healthy collection of profit centers.

Better still, Alphabet is the master of free cash flow, and it uses that cash to both reinvest in the business and deliver shareholder value. While Google stock does not pay a dividend – yet – the company is focused on share repurchases when possible. That’s a win for investors. 

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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.