Google is one of my favorite stocks, but I don’t often talk about it on this channel. So I wanted to go through some of the reasons I like Google stock, where it’s at, and why I own it in the portfolio. I know their official name is Alphabet, but it’s one of those things where I’ll probably always call them Google.
Google, I don’t think, needs much of an introduction when it comes to its profile. They have an insane amount of different products. If you go to their latest 10-K, you’ll see that the bulk of the revenue is coming from advertising. Out of $257 billion in revenue, $209 billion of that in 2021 came from advertising. They also have Google other and google cloud is pretty exciting because that’s a very fast-growing segment for the business. And then they also have these other bets, which consists of, these moonshot plays.
Google as a company realizes as a technology company, things move fast and technology’s exponential. So they need to be making bets for the future in order to not become stale and kind of become tech dinosaurs that have their heydays and then fall off (*cough IBM *cough). One example of a moonshot bet that they took 15 years ago was actually YouTube. And they bought it for the price of $1.65 billion. YouTube ads alone in 2021 brought in $29 billion in revenue.
And you want to know who was punching the air when they hear that number? Netflix. Because in 2021, they brought in revenues of close to $25 billion.
The crazy thing about YouTube is it’s all user-generated content and Google itself only really has to focus on building the platform. But I think they’ve done an amazing job versus any other social media platform is they have incentivized the users to generate really good content by having the best sharing model in terms of revenue. If I compare it versus Facebook, Snap, TikTok, they don’t really share the revenue as much as YouTube does. And you can see that that model of, focusing on the creator pays huge dividends, especially after the 15 years that they’ve really built up YouTube.
In terms of current moonshots the company is working on, they are working on artificial intelligence research as well as quantum computing. Both of these areas, whichever company figures out these two first are going to unlock a crazy amount of value for shareholders.
So their bread and butter is advertising but what’s nice about Google versus a company like Meta platform, Snapchat, Twitter. All these other social media plays that make a lot of money from advertising as well is that Google owns more infrastructure, whether that’s Android, Chrome browser, they have more control over what’s going on in their ecosystem. So they own the ecosystem, and it’s easier not to get blocked out by other companies. You see kind of what’s happened with Facebook with Apple Privacy and their changes. And then Google actually has come out and basically said they’re going to do the same thing with cross-app tracking. So they’re able to control their own destiny because they own the infrastructure. And that’s one of the reasons that having Google is actually a little bit different than some of these other advertising plays. And when you look at digital ad spending. 2021 was a really good year.
The growth is supposed to slow down a bit. But the majority of ad, spending when it comes to media buying is going to digital ad spending. And most of that does go to players like Google, Amazon, and Facebook.
In terms of valuation, yes, the company is massive, with a market cap of $1.75 trillion. But we always need to compare the growth of a company with its actual earnings to see does the valuation makes sense. Is there still room for upside? And with Google, what’s crazy is that even though it’s this big, it’s still growing at a pretty good pace. 2021 was a bit of an exception in terms of crazy growth, I don’t think they can sustain 41% growth in terms of revenue year over year, every single year in perpetuity. They also had an increase in margins, so they expanded their revenue and they expanded their earnings per share.
The price-to-earnings ratio for this company has come down quite a bit. Currently, it sits around a PE of 24. Which we’ve seen over the years, it’s actually come down quite a bit. And to the point where the five-year expected growth rate for earnings. When you divide the PE by that earnings per share growth, you get a PEG ratio of under one. Which makes it pretty close to fair value. And if this company is growing their earnings per share around 24% per year, that’s kind of what you’d expect to gain from the stock if it held this PE at a constant rate of 24, which is fantastic, right? Well I would take that in a heart beat!
The company has pretty good operating margins. Their balance sheet is absolutely a fortress total cash of $140 billion and the company is generating a good amount of free cash flow that will just continue to add onto the pile so they can make acquisitions in the future. I don’t know if the company will start paying dividends. I don’t know if Google has it in them too, pull an Apple and start paying a dividend, but I wouldn’t mind as a shareholder.
And then lastly, they actually announced a 20-1 stock split, which we all know doesn’t necessarily change the intrinsic value of the company, but we know kind of what happened with Tesla, Apple, after all their splits. So that’s other good news that’s on the horizon. For every one share that you own of Google, you’ll get 20 stocks in return. And that’s supposed to happen around the July 2022 time frame.
Outside of looking at the PEG ratio. If you use something like Finbox using 15 different valuation methods, they come up with a fair value of around $3,300 or 25% upside from here. Wall Street analysts have a $3500 year out target. We also have the greatest investor of all time, Nancy Pelosi, buying long-dated call options on Google at the beginning of 2022. Growth stocks that are trading at a high price of sales ratios are getting absolutely hammered and they continue to get hammered, but when you look at a growth stock like Google, the multiple actually makes a lot of sense.
They’re generating free cash flows in terms of everyone being afraid of interest rate hikes and things like that affecting these companies that are unprofitable. Well, Google is a free cash flow machine, so that’s less of a concern for me when investing in a growth stock like Google versus maybe an unprofitable growth stock that has a little bit faster revenue growth expectations but isn’t generating a ton of profit right now.
From a technical standpoint, what’s interesting with Google is they had this big gap up after the, uh, earnings because the earnings were a beat. The stock split was announced. There were a lot of bullish notes within the earnings themselves. With everything going on in the market, with the geopolitical fears, the market has definitely taken Google down with it. In my opinion, if you’re able to buy really good companies when the market sentiment is bad (which we’ve had since the beginning of the year), that’s always a positive in my eyes for Google.
This is actually a company that I’m looking to add a little bit more to the portfolio even though I have a higher allocation to the stock already. Plus there’s a piece of me as a full-time creator now and a portion of my income coming from Google, whether that’s my website or YouTube, I like to think of the investment as a hedge. Even though maybe, views are going to another channel. Indirectly, I’m still benefiting by owning Google stock.
Let me know down in the comments below what your thoughts are on Google. Are you buying it? Or do you already own too much of it so you can’t buy it?
This article was generated from the following Youtube Video: