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Not short of ambition or criticism, Google is a sibling in the illustrious FAAMG family and one of Silicon Valley’s finest – but is its stock a buy?
Keep reading our Google Stock Forecast and Analysis to learn more about this investment opportunity. As always, our analysis is backed by hours of research.
What is Google?
At its core, Google is a search engine that sells advertisements. Data is the new oil as society shifts online – and Google has a lot of it.
The company was founded in 1998 by two Stanford students and has grown into the 5th largest company in the world by market cap, up to $1.3 trillion.
While search-related advertisements remain its main revenue source, Google’s startup mentality spawns’ projects and subsidiaries extending far beyond Search, such as Google Cloud for cloud computing, DeepMind for AI research, and Waymo self-driving cars, and the semi-secret “X” R&D organization.
To satisfy this thirst, the company restructured in 2015 and created “Alphabet”, which serves as the parent company to Google and its other divisions.
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Google (GOOG, GOOGL) Stock Bull Cases
#1. Search & Digital Advertising
Advertising accounted for 81% of Google’s revenue in 2020 – an eye-watering $140 billion. So how did Google become the digital Don Draper?
Data – advertising is all about data. Google has the world’s largest war chest of data by collecting the search habits of its users.
Google compiles user data and builds advertising profiles of Googlers to deliver personalized ads with higher conversion rates.
Its algorithm gathers information like age, interests, and location to display ads not just for products or services it knows you’re interested in but things it thinks you’re likely to buy.
This begs the question, “are we controlling technology, or is it controlling us?”
Example: Google Maps realizes that you’ve gotten in your car around 6pm and driven to Chipotle the past few Sundays.
It recommends better routes or hammers you with YouTube ads for Chipotle and Shake Shack as dinner approaches.
On second thought, it decides that you’re enjoying that video and should stay in for the night, so it flashes DoorDash, and UberEats ads on your Instagram — dinner gets delivered tonight.
Google notices that you haven’t moved from your couch in a few hours but doesn’t remember you buying furniture recently — you’re due for an upgrade. An Amazon ad appears on your feed, and the new recliner will be delivered on Tuesday.
All you’ve done is move your thumbs. Google’s gotten paid by Chipotle, Shake Shack, DoorDash, Uber, Facebook, and Amazon (AMZN) – all while improving its ad profile on you for next time.
Note that Google can use your information without identifying you personally.
Instead of telling an advertiser “Joe, Nancy, and Tom like Ford F-150s,” it might say, “these IP addresses browse trucks all day long.”
#2. Google Cloud
Google Cloud is going head-to-head with the cloud giants Amazon (AWS) and Microsoft (Azure).
Currently, Google is third in the cloud Infrastructure-as-a-Service (IaaS) with its 9% share of the cloud market.
Some cloud experts believe that Google Cloud is “the market’s fiercest challenger” because of the way that customers can access and engage with Google engineers for co-development.
While this may be difficult to scale, this feature is causing more AI- and machine learning-focused companies to choose Google Cloud over AWS and Azure.
However, gaining share of the cloud market is a tough business. While Cloud revenue grew 47% YoY in Q4, it lost the company $5.61 billion during 2020.
Related: Best Cloud Computing Stocks
Google bought YouTube for $1.65 billion in 2006, and it’s truly one of the best tech deals of all time.
In fact, A Needham analyst recently valued YouTube at $300+ billion if it were a standalone company.
Today, YouTube reaches more 18-49-year-olds than all linear TV networks combined, and 100+ million people stream YouTube from their television sites.
While known for its user-generated content, it officially entered the (paid) streaming wars with the launch of YouTube TV in 2017, which streams live sports, news and shows from 70+ channels.
YouTube TV’s foray into live sports indicates it’s going for the ultimate hybrid-streaming platform.
Google revealed that YouTube’s “direct-response” ads are catching on — a revenue stream that was nonexistent three years ago.
These ads encourage consumers to take immediate action, like downloading a meditation app or buying a shirt from Shopify.
YouTube has a monopoly on “videos”, and it’s just getting started.
#4. Recovery Dark Horse
Several Wall Street analysts believe Google is a “recovery dark horse” following the COVID-19 pandemic.
They estimate that 10% to 15% of Google’s “paid search” revenue comes from travel-related businesses. This segment disappeared for much of 2020.
People are booking trips as the economy reopens, and Google will be there to suggest, facilitate, and profit from every vacation decision.
#5. Index Fund for the Future
The company’s Alphabet restructuring allows it to explore the things that make Google, Google – while remaining focused on its breadwinner (Search).
Google’s hundred-billion-dollar ad business subsidizes these efforts to an even larger degree than Amazon leverages AWS.
These ambitious side projects, or “Other Bets”, essentially serve as startups within the walls of Google.
This leaves everything on the table for Google and makes it unlike any other company on Earth.
Google uses its trillion-dollar capabilities to play the long game on projects that no one else is willing or capable to pursue.
While these subsidiaries are often criticized by shareholders, it’s reductionary to view them as financial successes or failures in a vacuum.
Google’s collaborative culture breaks down the walls of the organization; a comment that was made in the Calico biotech department might help a Gmail engineer later that day.
Google’s war chest of capital and genuine thirst for innovation (beyond its core offering) makes the company an index fund for the future.
Google’s Optimistic Moat: A Startup, but with Billions
Google’s differentiator is its ability to behave like an agile startup while having billions in capital to deploy. Some credit Google’s “hive mind” or collective consciousness as its key to success.
Google might be the most collaborative company globally – so much so that new executives are often caught off-guard by the transparency.
The company’s internal communication tools let employees hop on Google Docs or Slides from any department, which creates a culture of feedback that accelerates progress and innovation.
It’s normal for companies to become more hierarchical as they grow, but Google encourages the free flow of ideas up, down, and across the organizational ladder.
Google’s Pessimistic Moat: A Monopoly on Search
Google was the first Silicon Valley company to reach verb status – “Google it” – revealing its dominance amongst search engines.
Corporations pay Google exorbitant amounts of money to appear high up in search results; Google’s page one is some of the world’s most expensive real estate.
Today, Google controls 92% of the worldwide search engine market share. It is the toll collector of the internet, and there isn’t another booth in town.
Google (GOOG, GOOGL) Stock Analysis
Google took a hit in Q2’20 as companies cut back on advertising during tough times. However, the ad business is picking up right where it left off.
Here’s a look into Google’s recent earnings:
- Earnings: $22.30 per share (adjusted) vs $15.90 per share expected
- Revenue: $56.90 billion vs. $53.13 billion expected
- Google Cloud: $3.83 billion vs $3.81 billion expected
- YouTube Ads: $6.89 billion vs $6.11 billion expected
- Traffic acquisition costs (TAC): $10.47 billion vs $9.32 billion expected
- Revenue increased 23% YoY (last year’s Q4 growth was 17%)
- YouTube ad revenue increased 46% YoY
- YouTube now reaches more than 18–49-year-olds than all linear TV networks combined
First time releasing Google Cloud’s operating income:
- Lost $5.61 billion during 2020 and $1.24 billion in Q4 alone
- Cloud revenue grew 47% YoY
- Cloud inked several “billion-dollar deals” in 2020
CEO Sundar Pichai added that he’s very pleased with the Cloud’s progress, and the company will continue to make investments to scale the business and improve profitability.
Google’s “Other Bets” is always a controversial subject – its intentions are core to Google’s DNA, but some investors consider it wasteful. It includes the self-driving project Waymo and life sciences unit Verily.
Here’s how it did:
- Q4 Revenue: $196 million
- 2020 Revenue: $657 million
- Operating Loss of $4.48 in 2020
Investors responded well to these better-than-expected results, and the stock jumped nearly 8% after the call.
Google Bear Cases
On July 29, 2020, the CEOs of Amazon, Apple. Facebook and Google testified before Congress on topics from antitrust to censorship.
A few months later, the Justice Department sued Google for violating antitrust laws, attempting to “stop Google from unlawfully maintaining monopolies through anticompetitive and exclusionary practices in the search and search advertising markets.”
Then there’s the controversial Section 230, which is a law that provides liability protection for websites and platforms (like YouTube) that host user-generated content and allows sites to monitor that content – i.e. “We aren’t responsible for what’s said on our platform the same way Verizon isn’t liable for what’s said in phone calls.”
Section 230 is interesting because politicians on both sides of the aisle agree that the law needs to be changed, but for different reasons.
Democrats argue that it allows extremist content to spread, and Republicans claim that it permits Big Tech to censor conservative voices.
YouTube’s been accused of algorithmically addicting the youth and targeting children with advertisements.
The Google subsidiary recently paid a record fine of $170 million to settle with the FCC and New York Attorney General about collecting children’s personal information without their consent.
In 2019, YouTube CEO Susan Wojcicki famously revealed that she doesn’t let her children use the main YouTube platform (her quote was taken out of context – her children use the version made for users under age 13, “YouTube Kids”).
Ok, so what does this mean for Google stock? We believe that regulators might cause short-term turmoil for Big Tech, but nothing substantial will be enforced that would negatively affect the companies in the long term.
It appears that regulators use these hearings to score political points with their base and aren’t concerned with implementing any actionable change.
These proceedings consist of the politicians bickering amongst themselves as much as they “grill” the CEOs.
When the politicians agree that something needs changed (Section 230), they politicize why it needs changing, which ironically leaves the law unchanged.
While FAAMG spends millions each year on lobbying in DC, we believe they aren’t too concerned with impending “potential” regulation and are more than willing to Zoom into a DC courtroom every six months and do the song-and-dance with Congress.
A fine will be issued, the company will pretend to be affected, and business will resume as usual.
#2. Internal Dissent
The same collective consciousness that produces innovation has sparked dissent at Google. In 2018, more than 20,000 Google employees worldwide organized a walkout in protest over the company’s handling of sexual harassment.
These employees used Google’s internal communication tools to coordinate the walkout across offices in Japan, Singapore, Europe, New York, and California – all in a few days.
This revealed some tradeoffs to encouraging a transparent, open culture of ideas and feedback at an organization with 100,000+ employees.
Google’s open culture can lead to the next great product of the future, like Waymo, but it can also lead to internal dissent and global walkouts.
Another incident worth mentioning is Google’s Project Maven with the Pentagon, which used AI to decipher drone footage.
Google employees were outraged when they discovered their AI and machine learning technology was being used for warfare.
After several internal “town hall” events and publishing their “AI Principles”, Google announced it would not renew its contract with the Pentagon.
Palantir (PLTR) co-founder Joe Lonsdale declared, “Google is clearly not a patriotic company.” Palantir believes that the country with the most powerful AI will determine the rules; they want that country to be the United States (or another Western country).
A year later, Google defined the Project Maven withdrawal as a “one-time reset” and that it’s “eager to do more” when it comes to defense-related AI.
There isn’t any competition when it comes to Search, but Google is much more than a search engine.
It competes with every technology company under the sun — here are its top competitors:
- Amazon (AMZN)
- Yahoo! (AABA)
- Bing (MSFT)
- AWS (AMZN)
- Azure (MSFT)
- Alibaba Cloud (BABA)
- IBM Cloud (IBM)
- Salesforce (CRM)
- Tencent Cloud (TCEHY)
- Oracle Cloud (ORCL)
- Netflix (NFLX)
- Disney+ (DIS)
- ESPN+ (DIS)
- Hulu (DIS)
- HBO Max (T)
- Paramount+ (VIAC)
- Apple (AAPL)
- Microsoft (MSFT)
- Tesla (TSLA)
- Apple (AAPL)
- All Other Automakers
Google is up against great companies, but regulation is the only thing that can slow it down.
Google Stock Allocation in Your Portfolio
Your allocation to Google is unique to your investing situation; factors such as time horizon, risk tolerance, and overall goals will vary from person to person.
However, these questions might help you gauge your conviction on Google stock:
- Will regulation affect Google’s long-term trajectory?
- Will Google successfully adapt to the future of search?
- Is there more upside in other FAAMG stocks?
- Is Google well-differentiated against competitors?
- Can Google Cloud compete with AWS and Azure?
- Will YouTube TV be the future of live sports?
- Is the Invesco QQQ ETF a better investment in the future of technology?
See: Best FinTech Stocks
Additional GOOG & GOOGL Coverage
See which stock they’re recommending for Q2’21 and join the other 700,000 members that count on the Motley Fool to beat the market.
See: Motley Fool Review
Google Stock FAQs
Is it better to buy GOOG or GOOGL?
There’s little difference between GOOG and GOOGL when it comes to price appreciation.
However, GOOGL stock shareholders have voting rights at shareholder meetings, and GOOG shareholders do not.
This is why GOOGL trades at a premium (often less than 1%) to GOOG stock.
Does Google pay a dividend?
Like most high-growth technology stocks, Alphabet (GOOG, GOOGL) has never paid a dividend to shareholders. Instead, it reinvests its earnings into the company to stimulate more growth.
Is Alphabet stock a buy?
Alphabet (GOOG, GOOGL) is one of the best companies in the world. While Amazon, Apple, and Microsoft’s stocks have outperformed it in recent years, Google is off to a great start in 2021.
Bottom Line: Google Stock Forecast
Google stock has trailed its FAAMG counterparts for the last ten years, but it’s been Big Tech’s best performer in 2021 – this could be the decade of Google.
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Sean Graytok owns shares of Alphabet Inc.