enterprise

Google: Fundamentals Still Strong For This Tech Giant (NASDAQ:GOOG) – Seeking Alpha


Money tree made by us dollar bills. Business, saving, growth, economic concept. Investors strategy, funding symbol. Copy space

Velishchuk/iStock via Getty Images

It’s not often that you see giants like Google (NASDAQ:GOOG) (NASDAQ:GOOGL) at a nearly 30% discount, despite the fact that it continues to show tremendous growth. With revenues as large as New Zealand’s nominal GDP in 2021, it’s an understatement to say that Google isn’t going anywhere and that it presents a golden opportunity for long-term investors.

“Google cannot continue like this” Syndrome

When I look at Google stock, I still see a lot of mixed opinions. Most investors who criticize the company often fear that the company’s growth cannot continue like this and will eventually grind to a halt. Yet, against all odds, Google continues to outperform year after year.

The quote I used in the title actually came from an article I read on Seeking Alpha in 2015 about Apple (AAPL) stock. At the time, I remembered people worrying that Apple would not be able to sustain its growth, people criticizing the margins on their iPhones, and everything else under the sun to take credit away from the fact that Apple beat its earnings every quarter.

In fact, at the time, the author was right: Apple stock was able to sustain its growth and is now up more than 387.02%, compared to 90.30% for the S&P 500.

Apple Net Income

Statista

Some investors did not think that Apple could ever reach a market capitalization of US$1T, or that it could sustain such a high valuation as the largest company out there. A few years later, after reaching a market cap of US$1T, Apple reached a market cap of US$3T this year. When valuing Google, it is important to remove these artificial psychological roadblocks and accept that there may be much more growth ahead for Google, even at a US$1.4T valuation.

A Growth Machine

Google has several vertices in which it is expanding. The most notable are YouTube, Google Cloud, its AI and improving search. As for YouTube, the growth has been phenomenal. About 2.6 billion people actively use YouTube at least once a month, and that number is growing.

Unlike Instagram, Google does manage to counter TikTok with the introduction of YouTube shorts. Shorts have the same medium as a TikTok, and attract more than 30 billion average daily views. That’s 4 times as many as last year. Creators on the platform are also getting paid more than each, with the number of channels getting US$10K in revenue, up 40% YoY.

They have continued to grow despite the fact that the economy is opening up and people going back to their day-to-day activities.

YouTube Ad Revenue

Statista

Google has not been idle in the field of artificial intelligence, either. They have continued to develop their AI, launching multisearch to perform more advanced searches using a combination of images and text.

They will also have a huge advantage in the future when it comes to data, because they have such an immense user pool that they can pull all the data from, and have the ability to use that data and apply it to any future product. Google is far too often seen only as an advertising company, when in fact it is the data that drives this flywheel of growth.

Popular Websites by Visits

Statista

Another important department that is also sometimes overlooked is Google’s expansion in the smartphone market. According to market research from Canalys, the number of phones shipped by Google increased from 200,000 in the first quarter of last year to 1.2 million in the first quarter of this year.

That’s a growth of 380%, and Google now has 3% of the smartphone market share, compared to 1% last year. Apple, for example, saw 19% growth compared to Google’s 380%. Although Google’s market share is still quite small, it is growing at a very fast pace and quietly taking a lead in an immensely valuable market.

Valuation And Fundamentals

To begin this section in terms of valuation and fundamentals, I want to give an honorable mention to Google’s PEG ratio, which is currently 1.01 (TTM). I never thought I would be able to buy a legacy company like Google at these kinds of ratios.

In terms of revenue growth, Google had a phenomenal year in 2021 after a sluggish 2020. Revenue for 2022 is expected to be more modest compared to 2021, which is pretty normal considering they achieved 41.15% revenue growth in 2021, a record year.

Google Income Statement

TIKR Terminal

Despite this rapid revenue growth, they were even able to increase their gross margin to 56.48% in the first quarter of 2022 from an average of 53.6% in 2020. Their bottom line also improved, with an operating margin of 30.6% compared to 22.6% in 2020. This was a significant jump, as their operating margins previously almost never exceeded 25%.

In terms of free cash flow, Google still remains a monster, despite investing over U$40BN in 2020 and 2021 combined. Currently, Google pulls in $68.99 billion in free cash flow annually. Their balance sheet is also untouched, with US$134BN in cash and cash equivalents alone. Their FCF margin has also only improved and now stands at 25.5%, compared to 16.7% in 2018.

Google Financial Highlights

TIKR Terminal

Historically, Google’s average P/E ratio is at an extreme low level. Over the past 5 years, the average P/E ratio for Google is 33.40, and the median is 30.83. Currently, we have a P/E ratio of 19.61 (TTM). While doing research for this article, I tried to find another moment in history where Google traded at a lower P/E ratio, but I realized that this is the lowest it has almost ever been. The only occasion I could find where Alphabet traded at a lower P/E ratio was in 2010-2011, shortly after the financial crisis.

The best I could find in the data over the last decade was a P/E ratio of 20.71 on 20.03.2020, at the low point of the COVID pandemic. This shows how bearish the attitude on the macroeconomic front is at present. As for the P/S ratio, almost the same holds true, with only a few days in the depths of 2020 and 2019 beating the current P/S ratio.

Chart
Data by YCharts

And yet, despite all these positive trends that have never been broken, investors seem overly concerned about macroeconomic turmoil, and prioritize short-term profits over long-term gains. So-called “experts” who claim that this is dotcom 2.0 have evidently not conducted any research themselves.

This argument can easily be refuted by the fact that in the dotcom era, the Nasdaq composite reached a price-to-earnings ratio of 200. Today, we are at a price-earnings ratio for the Nasdaq-100 of about 24 to 25. In the dotcom era, Internet companies simply did not bring in a quarter trillion in annual revenue, more than the entire nominal GDP of some small European countries.

Google Revenue

Statista

In the long term, other equity analysts predict that Alphabet will post earnings per share of 152.28 by the end of 2024. If we take Google’s historical median 10-year price-to-earnings ratio, which is 28.43, and multiply that by its annualized earnings per share, Google is expected to trade at US$4,329.32. That’s a 99.32% price change from today, by the end of 2024/early 2025.

I realize that this simple forecast is relatively optimistic, and implies that Google will not experience a serious decline in growth, but even if it did, you would still be trading much higher than today’s share price. Not to mention the upcoming stock split and the benefit that some small investors will derive from being able to buy options with less capital and more flexibility, coupled with the psychological benefits that the stock will derive from this.

The Actual Risk

The real serious risk that I think investors need to weigh especially is that it will be categorized as a monopoly and will be hit with a number of antitrust complaints.

In the past, Google has received numerous fines from the European Commission, amounting to billions in fines. For example, in 2017, the European Commission imposed a fine of $2.7BN, Alphabet’s 10-K shows. In 2018 and 2019, they were also fined US$5.1BN and US$1.7BN, respectively. Google is determined to comply with both US and EU regulators, and are prepared to defend themselves at all costs.

Google Market Share

Statista

It was also announced a few days ago that a bipartisan bill would be introduced, specifically targeting Google. The bill would force all agencies that conduct more than $20 billion in digital advertising transactions annually to stop being able to participate in both sides of the digital advertising process.

Currently, Google runs an exchange where ad transactions are done and also runs tools to help companies sell and buy ads. With this new bill, it would have to choose which part of the business it wants to remain.

The Bottom Line

It seems like a golden opportunity to rake in some Google shares and lock them in until the end of the decade. Instead of dreading the current macroeconomic turmoil, I have been taking advantage of this wave of selling that occurs only a handful of times per decade.

With its brand legacy, stunning growth, large pile of cash and huge free cash flow, Google seems like one of the most robust companies to buy in these times of uncertainty, while still offering you growth.



READ SOURCE

Leave a Reply

This website uses cookies. By continuing to use this site, you accept our use of cookies.