It’s still early in 2021. But will this be the year that Google stock finally out-performs other FANG stocks? Investors seem to like the fourth-quarter earnings and 2021 outlook of GOOGL stock more than Facebook (FB), Amazon.com (AMZN) and Netflix (NFLX).
Google stock bulls trumpet a rebound in digital advertising as Covid-19 vaccinations expand, boosting global economies as industries normalize. Internet search advertising and YouTube advertising revenue topped analyst estimates in the December quarter, sparking a rally in GOOGL stock.
Under new Alphabet (GOOGL) Chief Executive Sundar Pichai, Google has improved transparency. In its fourth-quarter earnings report, Google disclosed that its fast-growing cloud computing business is unprofitable amid high investments.
Still, cloud computing operating margins are expected to improve. Bank of America analyst Justin Post offered an upbeat view in a recent report to clients.
“We think new cloud disclosure suggests optimism on margin trajectory, and we see a potential $10 billion profit improvement over the next five years using Amazon margins as a target,” Post said.
Meanwhile, an ongoing stock repurchase program has boosted earnings for GOOGL stock. In the fourth quarter, Google bought $7.9 billion of its own shares. It also purchased $7.9 billion in the September quarter and $6.9 billion in the June quarter.
Google has about $15.4 billion remaining in a stock buyback authorization.
Still, there are wild cards that figure in valuation for Google stock. One is the Waymo autonomous vehicle business.
Also, Google stock bears point to tougher regulation.
Google Stock: Antitrust Court Battle Could Drag On
The Department of Justice on Oct. 20 filed an antitrust lawsuit against Google. The Justice Department charged that Google has harmed competition and consumers by monopolizing internet search and search-related advertising. Due to its huge cash holdings, GOOGL stock has shrugged off three fines totaling $9.3 billion levied by the European Union on antitrust grounds.
The Justice Department, though, could force Google to restructure if it wins in court. Some analysts say Google stock will be worth more if the company is broken up. A legal battle likely will drag on for years.
In addition, Congress may overhaul Section 230 of the Communications Decency Act in the hopes of reigning in web giants. The law guards web publishers from liability over third-party content.
Most investors still know the company as Google, even though the internet search giant reorganized as holding company Alphabet in 2015. The restructuring move separated Google’s core internet advertising business from so-called moonshots, such as autonomous vehicles and the Verily Life Sciences unit.
In a cost-savings move, Google has shut down Loon, its internet balloon project.
Google stock’s strength in artificial intelligence spans digital advertising, the Google Cloud Platform, YouTube and consumer hardware products. GOOGL stock is just one artificial intelligence stock to watch.
GOOGL Stock: Advertising Core Business
Google still dominates in digital advertising, along with Facebook. While Google has expanded into cloud computing and consumer hardware, digital advertising still makes up the lion’s share of revenue.
With Amazon gaining ground in digital advertising, Google recently made a big change in how it handles e-commerce listings. Amazon’s advertising revenue will boom 47% to near $21 billion in 2020, according to a Factset estimate.
In December, 2019, Google co-founder Larry Page stepped down as Alphabet’s CEO. Pichai, who headed the Google unit, replaced him. Google co-founder Sergey Brin stepped down as Alphabet’s president.
Google’s profit margins remain an issue amid high investments in data centers for cloud computing, artificial intelligence, YouTube and consumer products.
In early 2018, Google changed accounting methods. It switched to reporting GAAP earnings, or generally accepted accounting principles. GAAP earnings include stock-based compensation.
Meanwhile, Google has struggled to gain share in cloud-computing services vs. Amazon and Microsoft (MSFT).
Bank of America forecasts that YouTube’s subscription business will reach $18 billion in revenue by 2025, up from $5 billion in 2020. In addition, YouTube is benefiting as major brands shift ad budgets from linear TV to digital channels.
YouTube has over 30 million music and premium paid subscribers and YouTube TV has more than 3 million subscribers, Google said on its September quarter earnings call.
GOOGL Stock: Fundamental Analysis
Google’s December-quarter earnings rose 45% from a year earlier to $22.30 an adjusted share, including an investment gain on equities of $3.05 billion. Gross revenue rose 23% to $56.9 billion. Analysts had projected Google would report revenue of $52.8 billion, with earnings of $18.59 a share, according to FactSet.
Cloud computing revenue climbed 47% to $3.83 billion vs. analyst estimates of $3.8 billion. Still, Google’s 47% cloud revenue growth lagged Microsoft’s 50% in the December quarter.
Further, Google said the cloud-computing business lost $1.24 billion in the December quarter and $5.6 billion overall in 2020. Google has increased spending on cloud sales staff for the enterprise market and data center infrastructure.
Additionally, YouTube advertising revenue rose 23% to $6.88 billion vs. estimates of $6.15 billion. Big brand advertisers upped spending on YouTube content.
Overall advertising revenue rose 22% to $46.2 billion vs. estimates of $42.1 billion.
Google Properties revenue — which includes core internet search, the Play store and YouTube — rose nearly 22% to $38.8 billion vs. estimates of $35.7 billion.
Google reported net revenue — minus traffic acquisition costs, or TAC — of $46.42 billion, topping estimates of $43.7 billion. TAC rose 23% to $10.47 billion, well above analyst estimates.
TAC has been rising as Google relies more on Apple (AAPL), partner sites and third-party apps to generate mobile advertising revenue.
Waymo Autonomous Vehicle Business
A key question for investors is how much should self-driving-car project Waymo and “Other Bets” such as the Verily Life Sciences unit figure into valuation.
In early 2018, some analysts projected Waymo’s long-term valuation in a range of anywhere from $75 billion to $125 billion. Expectations for autonomous vehicles, though, have been lowered recently.
Waymo in early March raised $2.25 billion in funding from outside investors including private equity firm Silver Lake, the Canada Pension Plan Investment Board and Abu Dhabi’s Mubadala investment arm.
While Google did not disclose Waymo’s valuation in the funding round, reports said it was only $30 billion.
In October, Waymo Chief Executive John Krafcik announced that Waymo would be opening up a fully driverless ridesharing service in suburban parts of Phoenix to the public. The company had used human supervisors previously.
Google Stock: Pixel 5G Mobile Phones
Another question is the performance of Google’s hardware business. It’s battling Apple in smartphones and Amazon in smart-home appliances.
In September, Google rolled out new Pixel smartphones that support 5G wireless services. Apple rolled out 5G iPhones on Oct. 13.
With the Android mobile operating system built into devices sold worldwide, revenue growth from the Play Store continues to be a bright spot. However, the app service fees that Apple and Google collect face more regulatory scrutiny.
Also, Google in late 2029 agreed to buy smartwatch maker Fitbit for $2.1 billion. The purchase could help Google make a push into the health and fitness market, analysts say. The Fitbit deal finally closed on Jan. 14.
GOOGL Stock: Technical Analysis
Google’s cloud computing business, meanwhile, lags rivals Amazon and Microsoft. Google brought in Thomas Kurian, a former Oracle (ORCL) executive, to improve performance in the corporate market. Bulls say Google Cloud Platform is beginning to take share as it focuses on security, open source software and data analytics.
Google in June, 2019 purchased data analytics firm Looker for $2.6 billion in cash. Santa Cruz, Calif.-based Looker’s analytics platform uses business intelligence and data visualization tools. More acquisitions to boost Google’s cloud business could be coming, analysts say.
Meanwhile, Google’s Relative Strength Rating is only 65 out of a possible 99, according to IBD Stock Checkup. The best stocks tend to have an RS rating of 80 or better. But the Relative Strength Rating of Google stock as of March 3 beats those of Facebook, Amazon, Netflix and Apple.
Google Stock: Is It A Buy Now?
In addition, Google stock owns an Accumulation/Distribution Rating of B-plus. That rating analyzes price and volume changes in a stock over the past 13 weeks of trading.
The rating, on an A+ to E scale, measures institutional buying and selling in a stock. A+ signifies heavy institutional buying; E means heavy selling. Think of the C grade as neutral.
According to IBD MarketSmith analysis, Google stock consolidated after it reported September-quarter earnings, forming a flat-base entry point of 1,843.93. A 5% buy zone extends to 1,936.13.
From a weekly chart perspective, GOOGL stock has forged a three weeks tight pattern. That provides a new entry point around 2,145. As of March 3, Google stock traded about 4% below the three-weeks-tight entry.
Some argue that Google stock is long past the glory days when it gained nearly 800% in little more than three years after its initial public offering. In recent years, Google stock typically keeps pace with the S&P 500, punctuated by brief periods of outperformance.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and 5G wireless.
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