Search engine Google is owned by Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG). The company is a multi-national conglomerate with several lucrative income streams. Alphabet's leading source of income is Google, which it reports as two separate entities: Google Services and Google Cloud.
Combined, Google Services and Google Cloud account for roughly 99% of Alphabet's consolidated revenues.
Google Services include Google Search, YouTube, Android, Google Chrome, Hardware, Google Maps, and Google Play.
Is Google a Good Investment?
Google Services makes money from performance advertising and brand advertising.
However, the company is constantly looking to grow its revenues from sources other than advertising. This includes hardware sales, Google Play app sales, and YouTube subscriptions.
Meanwhile, its Google Cloud segment makes money from client service fees and Google Workspace collaboration tools.
Alphabet reports all its non-Google businesses collectively as Other Bets. These include such life-changing projects as self-driving cars and cancer cures.
Essentially, these 'other bets' are emerging businesses at various stages of development. This is very much an R&D incubator incorporating those at the conception stage to those in early commercialization.
Recent examples include Waymo driverless cars, Wing drone deliveries, Verily and Calico life sciences, and healthcare companies.
Alphabet now has a market value exceeding $1.3 trillion, so, naturally, investors wonder, "Is Google a good investment, and should I buy Google stock?".
Why is Google Called Alphabet?
The company was founded in 1998 and was known as Google until 2015. It then changed its name to Alphabet to better incorporate its various businesses.
In a statement at the time, co-founder Larry Page said the public "can expect us to make smaller bets in areas that might seem very speculative or even strange when compared to our current businesses."
Google Maps, Chrome, YouTube, and Android all started small and became major successes.
Page also liked that the new name represented an apt play on words:
“We also like that it means alpha‑bet (Alpha is investment return above benchmark), which we strive for!”
What is the Difference Between Google Share Classes?
Google has two classes of shares listed on the NASDAQ. There are Google's A shares (GOOGL) and Google's C shares (GOOG).
It also has B shares which the company founders and their peers privately own.
The owners of B shares have more voting power than other shareholders, receiving 10 votes per share.
Meanwhile, shareholders in Google's A shares get one vote per share, and owners of C shares get no votes.
C shares currently trade at a higher premium than A shares, which is the opposite of their historical trading pattern.
This is most likely due to Google's share buyback program.
Traditionally GOOGL class A shares have been more liquid than C shares.
Fundamentals of Google Stock
Even the most profitable of companies requires careful consideration before investors should jump in and buy shares.
Here's an overview of Alphabet's financial fundamentals.
Revenues
Google's total revenue came in at $257.6bn in 2021, rising 41.1% year-over-year, while revenues in 2020 were up 12.7% from 2019.
In 2021, $209.5bn of this was from advertising revenue. $19.2bn came from Google Cloud and $753m from Other Bets.
The increase in 2021 revenues was primarily driven by Google Services and Google Cloud. The adverse effect of COVID-19 on 2020 advertising revenues also contributed to the year-over-year growth.
Profitability
Net income of $32.4bn in the first six months of 2022 was down 11% from $36.4bn in the first six months of 2021. However, the devil is in the details, and a few complexities contributing to the fall in profits include forex headwinds impacting operating income and margins, as well as increased investment in its "deep" technical capabilities.
Sundar Pichai, CEO of Alphabet and Google, said:
In the second quarter, our performance was driven by Search and Cloud.
The investments we've made over the years in AI and computing are helping to make our services particularly valuable for consumers and highly effective for businesses of all sizes.
As we sharpen our focus, we'll continue to invest responsibly in deep computer science for the long-term.
Ruth Porat, CFO of Alphabet and Google, said:
Our consistent investments to support long-term growth are reflected in our solid performance in the second quarter, with revenues of $69.7 billion in the quarter, up 13% versus last year or 16% on a constant currency basis. We are focused on responsible capital allocation in support of our growth opportunities.
The pandemic boosted Alphabet's coffers as businesses paid for Google ads to target consumers spending more time online. Advertising revenue tends to be cyclical, and there has since been a pullback in ad spend.
Alphabet is a cash-rich company with $28.8bn in debt and $125bn in cash on the balance sheet.
Operating Margins
The company's operating margin slipped to 28% in Q2 2022 from 31% in Q2 2021. Yet, it remains above the five-year average of 24.8%.
Alphabet appears in 318 exchange-traded funds (ETFs), with 694.82m GOOGL shares in US ETFs.
Google doesn't offer a dividend.
Its price-to-earnings ratio (P/E) is 19x, while its five-year average P/E is 33.1x.
GOOGL EV/Sales ratio is 4.4x
Between February and March 2020, as the pandemic began to take hold, the Alphabet share price plunged 31%. It then proceeded to soar throughout 2021. But in 2022, it fell 30% between January and October.
Gross Profit Margins
Google's gross profit margin came in at 56.8% in Q2, 2022.
What is the Bull Case for Google?
Alphabet has a lot going for it. First and foremost, the Google search engine is far and away the most dominant in its space.
Google Search remains its primary revenue source. And with a 92% market share in the search sector, this affords the company an impressive moat.
A company moat is what Billionaire Warren Buffett refers to as a key feature that gives a business its competitive edge.
Improving Google Search depends on improving its artificial intelligence, which relies on more and more users interacting with the platform.
Therefore, the success of Google becomes a self-fulfilling prophecy as an improved search experience attracts more users.
Furthermore, Android is by far the world's biggest operating system. This also gives Google a competitive edge.
Google is also involved in email, social media, analytics, robotics, artificial intelligence, augmented reality, cyber security, health tech, and much more.
Having extensive cash on hand, and the means to borrow, gives it added bargaining power when it comes to M&A.
Simply put, if it spots a disruptive player in the market, it can simply swoop in and buy them out, just like it did when it bought YouTube for $1bn and Fitbit for $2.1bn. More recently, it paid $5.4bn for Mandiant, Inc. (NASDAQ: MNDT), a recognized leader in dynamic cyber defense, threat intelligence and incident response services. Mandiant will join Google Cloud and retain the Mandiant brand.
Future Growth Opportunities
Alphabet's future growth could come from YouTube, its Google Cloud offering, and advancements in hardware. It may also come from its involvement in cyber security or health care.
YouTube is enjoying a surge in growth as more consumers opt to sign up for its premium package and content providers see the value it offers. Indeed, there are now more than 2.5 billion global YouTube users.
Several celebrity names are joining the platform, as are mainstream media and providers of high-quality informational content.
For many users, YouTube is the first place they search for answers, as opposed to Google directly.
Google Cloud is also enjoying revenue growth. This is a sector expected to see continued demand as security and reining in costs become paramount.
Google's hardware segment includes consumer-facing devices such as healthcare technology, including wearables, home devices (Google Nest), phones, streaming devices, tablets, and video cameras.
Meanwhile, Alphabet is aggressively advancing investment in the wearable space. It acquired Fitbit last year, and Fitbit users must log in via their Google accounts next year.
The smartwatch market is a competitive but growing sector. Consumers enjoy the extra dimension and control it adds to their lives, from managing schedules to fitness and health tracking.
Alphabet's competitors in the hardware space include Apple (NASDAQ: AAPL), Garmin (NASDAQ: GRMN), Amazon (NASDAQ: AMZN), Huawei, and Samsung (KRX: 005930).
Share Buybacks
When a company buys back its stock, it reduces the number of shares in circulation. This increases their value to existing shareholders.
In the first two quarters of 2022, Alphabet bought back $13.3bn and $15.2bn worth of shares, respectively.
What is the Bear Case for Google?
When it comes to investing, even the top companies face pitfalls. Here are some reasons to be wary of buying shares in Alphabet.
Regulatory Scrutiny
As with other large-cap technology stocks, Meta (NASDAQ: META), Amazon, and Apple, Google is another stock facing mounting regulatory scrutiny. It's also been subject to several antitrust lawsuits.
In 2017, Google was fined €2.4bn by the EU for manipulating search results to promote its shopping sites.
Discontinued Projects
Not everything Google touches turns to gold. In fact, many of its exciting new projects end up in the discontinued bin.
Wave, Buzz, Knol, Google Offers, Google Reader, Google+, Google Hangouts, and Google Glass are just a few disappointing projects that underwhelmed the market.
Growth May Slow
The company enjoyed a surge in growth during the pandemic, but the higher interest rate environment is not good for tech stocks or advertising revenues, so overall growth may slow.
Billionaire investor Warren Buffett does not own Alphabet stock. He has said that he regrets missing out but, right or wrong, lacks the conviction to buy at this later stage.
Despite an exceptional profit and cash boost, 2020 was Alphabet's lowest period of sales growth in 11 years.
Forex Risk
Google invests in foreign currency forward contracts to hedge its foreign currency risks. It also uses derivatives not designated as hedging instruments to manage risks relating to interest rates, commodity prices, credit exposures and to enhance investment returns.
Competition and Macro Factors
Its Google Cloud division faces tough competition from Amazon and Microsoft (NASDAQ: MSFT).
2022 is seeing financial markets exposed to bear market conditions. Inflation, interest rate hikes, recession and ongoing supply chain challenges are all factors affecting businesses. These could hit Alphabet directly and also indirectly as its customers experience pain and reduce their spend.
For instance, the global semiconductor shortages could impact the production of Alphabet hardware. And rising commodity prices could affect profit margins.
Then there's the risk of a major stock market correction or crash. US tech stocks have been on a significant bull run in recent years. Although they've fallen in 2022, they could still have further to fall, and a considerable pullback could take a long time to recover from.
Should I Invest in Google Stock?
Google is a $1.3 trillion company, so it's clearly getting something right and providing shareholder value in its quest to be the best.
Its 92% market share in search is remarkable. While its P/E of 19 is much lower than it previously was, it may still be too high for those concerned about an ongoing market decline.
Meanwhile, the company has said growth is unlikely to continue at record rates.
However, it's involved in many lucrative areas of demand in the online and tech arena.
It's also a popular stock owned by major institutions and has considerable cash reserves.
Altogether Alphabet appears to be a reasonably safe investment as far as stocks go.
Article updated October 5, 2022.