4 reasons to buy Alphabet before its stock split

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Four businessmen in suits pose together in a martial arts style pose as if ready to engage in competition or spring into a fight.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), the parent company of Google, will execute a 20-for-1 stock split on July 15. That split will lower Alphabet’s trading price from about $2,300 to $115, but it won’t actually change its market capitalization or valuations. 

Nonetheless, Alphabet might attract some extra attention from retail investors due to its lower price tag. It could also generate more liquidity through options trading, since a single options contract represents 100 shares. And its lower share price could eventually lead to its inclusion in the price-weighted Dow Jones Industrial Average.

Alphabet might seem like a wobbly investment after its first-quarter revenue and earnings miss, but I believe it’s still a great stock to buy ahead of its split for four simple reasons. 

1. An unbeatable advertising business

In the first quarter, Alphabet generated 80% of its revenue from Google’s advertising business (including YouTube). Its ad business certainly isn’t immune to macro headwinds — it suffered temporary slowdowns during both the Great Recession and the COVID-19 pandemic — but it has always bounced back from such downturns.

Between 2011 and 2021, Google’s annual advertising revenue rose from $36.5 billion to $209.5 billion, a compound annual growth rate of 19.1%. This year, eMarketer estimates Google will control 27.7% of the digital ad market in the U.S. — putting it in first place ahead of Meta Platforms (NASDAQ: FB) (24.2%) and Amazon (NASDAQ: AMZN) (13.3%) — and remain the market leader in most markets outside of China.

Therefore, if you expect Google to ride out the current macroeconomic headwinds, then this is still a great time to invest in its market-leading digital advertising business.

2. An expanding and inescapable ecosystem

Google’s core business has grown so rapidly because its ecosystem is practically inescapable. It owns the world’s largest online search engine, the most widely used mobile operating system (Android), the most popular web browser (Chrome), the top webmail service (Gmail), the leading online mapping service (Google Maps), and the largest free streaming video platform (YouTube). It also operates a growing list of adjacent services like YouTube Music, Google Workspace, Google Pay, and Google Photos.

Those digital tentacles consistently gather personal data from its users, which it uses to better target ads across its ecosystem. That approach is controversial, especially among privacy advocates and antitrust regulators, but it’s remarkably effective for advertisers.

3. A rapidly growing cloud business

Google operates the third-largest cloud infrastructure platform in the world after Amazon (NASDAQ: AMZN) Web Services (AWS) and Microsoft‘s (NASDAQ: MSFT) Azure. Google Cloud held an 8% share of the global market in the first quarter, according to Canalys, compared to a 33% share for AWS and a 21% share for Azure.

Google Cloud won’t catch up to AWS or Azure anytime soon, but its revenue rose 53% to $8.9 billion in 2019, 46% to $13.1 billion in 2020, and 47% to $19.2 billion (amounting to 7% of Alphabet’s total revenue) in 2021. That means it’s growing faster than AWS and at a comparable pace to Azure.

Google Cloud should continue to grow over the long term as it attracts retailers that don’t want to work with Amazon or tether themselves to Microsoft’s sprawling ecosystem of enterprise software. That expansion should gradually reduce Google’s dependence on its advertising business. 

4. High growth rates and a low valuation

Alphabet’s scale and diversification have enabled it to generate robust growth over the past decade. Looking ahead, analysts expect its revenue to rise both 15% in 2022 and 2023. They expect its earnings to dip 1% this year as it ramps up its spending, but to increase 19% in 2023.

Over the next five years, they expect Alphabet’s annual earnings to grow at an average rate of about 17%. Investors should take those long-term estimates with a grain of salt, but they give it a low 5-year price-to-earnings-growth (PEG) ratio of 0.8. Stocks with a PEG ratio below 1.0 are considered undervalued, so Alphabet looks dirt cheap relative to its growth potential. By comparison, Meta and Amazon have 5-year PEG ratios of 1.2 and 3.0, respectively.

It’s still a great long-term investment

Alphabet’s share price might struggle over the next few quarters due to investors’ concerns about macroeconomic headwinds for advertising and the recent slowdown in YouTube’s ad sales.

But as a long-term Alphabet investor, I’m not too worried about these near-term speed bumps. I’m confident Google’s platforms will continue to grow over the next decade, and I believe Alphabet’s upcoming stock split will generate fresh interest from retail investors and options traders. Simply put, this tech titan remains a rock-solid investment in a tumultuous market. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 4 reasons to buy Alphabet before its stock split appeared first on The Motley Fool Australia.

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Leo Sun has positions in Alphabet (A shares), Amazon, and Meta Platforms, Inc. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Meta Platforms, Inc., and Microsoft. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Amazon, and Meta Platforms, Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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