No doubt as an internet browser, you have generated revenue for Google. How? By clicking on Google Ads and AdSense ads that advertisers pay for per click. Because Google’s advertising engine is everywhere on the internet, the biggest challenge of Alphabet (GOOG), the parent of search engine giant Google, is not making money but diversifying its revenues. A broad diversification strategy is starting to pay off. Google Cloud and Google Home are leaders in high growth businesses. And Google’s once lofty plans for self-driving cars, drone delivery services and internet beamed from helium balloons are starting to generate revenues, and could even surpass the colossal ad spending business. Will GOOG stock also fly?
This guide will explain how to buy Google stock, evaluate the best Google stockbrokers, and assess the future performance of the company by looking at how the opportunities and challenges ahead could affect Alphabet’s stock value.
The world’s favourite search engine is powered by multiple business lines today. The majority of revenues, though, still come from gobbling up global ad spend revenues. Google’s ad revenues have been growing at an annual rate of 14 percent over five years. When deciding whether to invest in Google stock, you should consider all these key growth drivers:
Dominant share of global digital ad spend market – As the $273 billion global digital ad spend market doubles by 2022 (eMarketer.com), Google will gain the lion’s share of the revenues. The search engine giant commands over 80% of the global desktop search engine market and 95% of the global mobile search engine market.
The other business devouring ad spend revenues is YouTube, which Google bought in 2006. Video makes up 25% of digital ad revenue. Google does not report YouTube ad revenue, though Robert Baird reports 2018 revenue to be $15 billion, about 10 percent of Google’s $116 billion in ad revenues.
Investment in AI driving future growth – AI is behind Google’s plan to take on Tesla. Google is showing off new artificial intelligence (AI) tools that will not only steer its self-driving cars but also create more value in its advertising networks. Although paid advertising click growth is strong, the cost per click (CPC) continues to decline. As one example of how AI can improve ad performance, AI bots are switching to more responsive ads as the deep learning engine identifies which ads work best with search terms.
True to its reputation as a big R&D spender, Google has two think tanks, Google Brain and DeepMind. Google is applying AI in applications ranging from Google Photos and Google Translate to Google Home and Waymo self-driving cars. In the cloud computing business, which is now growing faster than search, Cloud AI is making AI tools easily accessible to enterprises.
Google Cloud and other services – Google Cloud uses machine learning to help enterprises make their data smarter. Number three in cloud services, behind AWS and Microsoft, and growing faster than the search biz, Google Cloud will invest billions in data centers in 2019. Google Home, which includes Google Assistant and speakers, is another fast-growing business in this segment. Revenues from Other Services is growing and taking a slice from the ad spend share, jumping 31 percent in the fourth quarter, to 16 percent (up 1.5 percent) of revenues.
Cons to buying Google stock
Low revenue diversification – Ad spending, which grew 23 percent to $136 billion in 2018, comprises 86 percent of revenues. Rising traffic acquisition costs in recent years have contributed to narrower profit margins in 2018. In coming years, Google Other Services and Alphabet’s other subsidiaries, especially self-driving car Waymo, will help widen profit margins.
Low China market share – China, the fastest growing country for digital ad spend, is the one country in which Google does not dominate the search engine market. Baidu is the search engine leader in China with a more than 80% market share, while other Chinese players make up most of the remaining 20 percent.
Risks of data breaches and scandals – One of Google’s biggest business risks is misusing the growing volumes of data its search engine and cloud centers process. Google, like Facebook, has been involved in data harvesting scandals. In 2018, Google’s foray into instant messaging with Google+ was shut down after the data of 52 million members were exposed.
Google Stock: Current Prices and Summary
Unfortunately, Google Assistant cannot tell us what Alphabet’s stock price will be in aone or five years. But we can make a fairly accurate prediction based on a long history of delivering consistent revenue and earnings performance.
When a stock is declining, the first question to ask is whether the cause is wider industry trends or a problem with the actual business. The first is an ideal scenario for investors to pick up an undervalued stock, and fortunately, the current situation of Google. Along with other FAANG stocks (Facebook, Amazon, Apple, Netflix, Google), Google started declining in the final quarter of 2018.
In 2018, both earnings and revenues beat analyst expectations, indicating that there are no serious problems in the underlying business. Google registered a ninth consecutive year of 20-plus percent revenue growth. Owing to its strong top-line growth, Citi has just made GOOG its favourite Internet stock pick. After reporting fourth quarter revenues in February, Alphabet was trading at a price-to-earnings ratio of 22, below its 5-year average of 30. Its price-to-future earnings – analyst estimates of future earnings – was also trading below its average. These attractive valuations could indicate it is a good time to invest in Google stock.