Alphabet: Negative trends in high-quality stocks

Athe alphabet (GOOGL) is a holding company, with Internet media giant Google, as a wholly-owned subsidiary. Google accounts for 99% of Alphabet’s revenue, due to the substantial revenue it generates from online advertising. Google’s other revenue comes from sales of apps and content on Google Play and YouTube, as well as fees for cloud services and other licensing revenue. Google also sells hardware products like Chromebooks, the Pixel smartphone, and smart home products including Nest and Google Home.

Google is the world’s largest search engine, and Alphabet shares outperformed in 2021, with gains of 67.0%. GOOGL shares have the highest annual earnings among all other FAANG shares. I am bullish on GOOGL stock. Is he among the top analysts’ picks for 2002?

Alphabet Business News

Alphabet recently announced several positive catalysts. In 2021, Alphabet expanded its infrastructure with new cloud regions around the world, strengthening its Google Cloud Platform. The new regions include Warsaw (Poland), Delhi NCR (India), Melbourne (Australia) and Toronto (Canada). According to the company, it operates the cleanest cloud in the industry, as this internet giant became the first company of its size to become carbon neutral, in 2007. Additionally, Alphabet has a strong investment focus. ESG and was the first large company to match 100% of its electricity consumption with renewables, starting in 2017 and every year since. The goal is now to achieve carbon-free energy by 2030.

Additionally, on December 19, 2021, Alphabet announced that it had entered into a deal with Disney (SAY) to upload their content to YouTube TV, while maintaining a monthly price of $ 64.99 for YouTube TV members. This represented a turnaround, as two days earlier Alphabet had announced that despite efforts, that deal had not been reached.

Additionally, Alphabet announced that Waymo, which is Google’s self-driving car technology, has extended its partnership with UPS (UPS) the autonomous transport of goods with class 8 trucks.

Alphabet Third Quarter 2021 Results

The good news about GOOGL stock earnings for the third quarter of 2021 has been a big blow to EPS and earnings.

Earnings per share of $ 27.99 was higher than Refinitiv’s estimate of $ 23.48 per share. The revenue of $ 65.12 billion was also higher than Refinitiv’s estimate of $ 63.34 billion.

Google’s advertising activity continues to be strong. Google’s ad revenue rose 43% to $ 53.13 billion, from $ 37.1 billion in the same period last year. YouTube ads hit $ 7.21 billion, up from $ 5.04 billion a year ago.

On the negative side of the news, YouTube’s reported advertising revenue was $ 7.20 billion, lower than the expected $ 7.4 billion. Google Cloud’s revenue of $ 4.99 billion was also lower than expected, with the estimate being $ 5.07 billion.

In addition, the reported traffic acquisition costs (TAC) were $ 11.50 billion higher than the estimate of $ 11.16 billion. If these costs continue to increase, Alphabet’s profit margins will be negatively affected.

In addition, in its segment operating results, Alphabet recorded an operating loss for both Google Cloud and Other Bets.

Philipp Schindler, chief commercial officer of Google, acknowledged the downsides of the business, saying: “We continue to see a lot of inequality” and “It is clear that uncertainty is the new normal”, referring to the pandemic.

On the other hand, a very positive catalyst for the intrinsic value of the GOOGL share is that Alphabet announced that in the third quarter of 2021, it had repurchased 4.6 million shares in total for 12.6 billion euros. dollars. The majority of these share buybacks concerned Class C shares.

Key indicators Negative trends

On an annual basis, Alphabet announced a decline in sales growth in 2019 and 2020, of 17.85% and 12.98%, respectively. In 2018, the sales growth was 23.36%. Gross income growth also declined in 2019 and 2020. The same trend applies to EBITDA growth.

I contend, however, that Alphabet has a strong balance sheet, with diluted EPS growth over 3 consecutive years and a very strong rebound in free cash flow in 2019 and 2020. Alphabet is diversifying its revenue generation with business areas such as cloud computing. and consumer equipment; In addition, artificial intelligence and YouTube offer great potential for additional monetization solutions.

The Taking of Wall Street

When it comes to Wall Street, Alphabet has a strong buy consensus rating, based on twenty-six buys and two holds awarded in the past three months. Alphabet’s average forecast of $ 3,368.75 implies upside potential of 14.65%.

Disclosure: At the time of publication, Stavros Georgiadis, CFA does not have any position in any of the titles mentioned in this article.

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