Google Stock set to soar with 32% revenue growth, 20-to-1 split
Shares of Google’s parent company Alphabet fell 9% from $3,019 – hitting their per-share high in early November before tech stocks plunged on fears of Fed tightening to fight the coronavirus. ‘inflation.
With the details of the Fed’s strategy priced into the market, investors should turn their attention to the companies most likely to sustain faster-than-expected growth.
And that means Google’s stock is about to go up. How? ‘Or’ What?
- Stunning Fourth Quarter Report
- Leadership in digital ads, catch-up in the cloud
- Cash inflow from retail investors
(I have no financial interest in any securities mentioned in this post).
Fourth quarter Boffo report
Investors always like stocks of companies that exceed expectations and increase forecasts. It’s no wonder Alphabet shares rose about 11% to an all-time high in premarket trading.
The catalyst is the company’s fourth-quarter revenue and earnings, which beat investor expectations. Alphabet’s revenue rose 32% to $75.33 billion, $3.17 billion more than expected, while its earnings per share of $30.69 were 12% higher, according to CNBC. to the Refinitiv consensus.
CNBC reported that Google exceeded expectations in many key business areas:
- Ad revenue – which accounted for 81% of revenue – rose 33% to $61.24 billion;
- YouTube ad revenue was light – at $8.63 billion – $240 million below expectations
- Google Cloud revenue up 45% to $5.54 billion, $70 million more than expected
MarketWatch reported that Alphabet did not provide guidance for the first quarter, which does not appear to be of concern to investors.
Digital advertising market leadership, cloud catch-up
Alphabet is a leader in digital advertising and is expanding its share of the cloud computing industry in an effort to become less dependent on it.
U.S. digital ad spend grew 38.3% in 2021 to over $200 billion. According to eMarketer, Google leads the industry with 28.6% market share in 2021, ahead of Facebook (24.2%) and Amazon (11.6%). By 2023, eMarketer predicted that Google’s share would decrease by 26.4% while Facebook (24.1%) and Amazon (14.6%) would increase their market share.
For investors keen to see how Alphabet will make up for this decline, Google’s strategy to increase its share of the $164 billion cloud computing industry could take comfort. According to the Wall Street Journal, Google lags – with 6% of the market – behind Amazon (41% share) and Microsoft (20%).
Still, Google’s 45% revenue growth rate compares favorably to what Synergy Research estimates to be the industry’s 27% growth. Google’s investment in CME Group and other cloud computing customers has helped it book long-term cloud contracts. “However, costs contributed to the cloud business posting a loss of $1.45 billion for the period,” according to the Journal.
Possible inclusion in the Dow Jones Industrial Index
Alphabet has another advantage when it comes to increasing its stock price: most people around the world use its services multiple times. These satisfied customers might be inclined to follow the saying of ex-Fidelity Magellan honcho Peter Lynch and invest in what they know.
Unfortunately, this has been difficult in recent years due to Alphabet’s high stock price. But that problem could be alleviated with Google’s plan for July 15 “a 20-to-1 stock split in the form of a one-time special stock dividend,” according to Bloomberg.
That would bring the price per share down to around $140 – where the stock hasn’t been since 2005. As Ed Clissold, chief US strategist at Ned Davis Research, told Bloomberg “Institutional investors can buy in size and the price per share does not matter, but for a small investor, a lower price per share makes it easier to buy a reasonable number of shares.
The split could increase the chances of Alphabet shares being added to the Dow Jones Industrial Average, which could bring a lot more capital into the stock. As Bloomberg explained, the DJIA is a price-weighted index, and a four-digit price makes a company’s stock price too high to add to the index, “without overwhelming it. all other members”.
Morningstar says Alphabet stock is trading 31% below its fair value estimate of $3,600. Senior equity analyst Ali Mogharabi is optimistic about its potential for profitable growth, citing expansion into “search advertising, further monetization of YouTube through the strengthening of its network-effect moat source and the ‘Google’s Cloud Growth Acceleration’.
While he warns of a decline in margins in 2022 due to “aggressive investments in the cloud offering”, he expects a return to margin expansion in 2023.