ParentGoogle Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) recently announced that it would split its shares 20 for 1 later this year. As a result, individual shares will become much more affordable for those who do not have the ability to purchase partial shares.
Stock splits do nothing to increase or decrease the underlying value of the company. However, they have traditionally been associated with bullish price action and positive management sentiment.
A company that splits its stock is the last reason to buy stock. Investors should always focus on fundamentals and company value, not just stock price. Yet for Alphabet, there are many fundamental reasons for owning stock far beyond the stock split.
N°1: Research: The best company in the world?
Google has a convenient monopoly on online search, which is perhaps the greatest company of all time. According to Oberlo, Google has achieved a market share of 91.4% in the global search market. With such scale, Alphabet can afford to invest what it needs to expand its moat against its rivals, while making huge profits.
Even more than 20 years after the launch of its search engine, Alphabet’s growth continues unabated. During the recently reported fourth quarter, Google’s search business grew by 36%, an incredible rate for a company that made more than $43 billion in revenue in the fourth quarter alone.
Unlike other social media stocks that have struggled, Google Search is less responsive to recent changes to the iOS operating system that have improved privacy at the cost of reduced ad targeting capabilities. Perhaps that’s why Alphabet’s digital advertising revenue was strong last quarter, likely taking a bite out of social media stocks that have had to adjust to the new landscape.
Alphabet can also use data from Google search to power recommendations for YouTube, its entertainment content platform which also saw an incredibly strong 25% growth last quarter.
No. 2: Cloud, cloud, cloud
If search weren’t the biggest company in the world, another strong candidate would be cloud infrastructure. Although Alphabet came late to the cloud computing market, it seems to have solidified a third place in this very attractive industry. Last quarter, Google’s cloud segment jumped 44.6% on an annual run rate of $22 billion, which is truly impressive.
Google Cloud is still losing money, but operating losses have narrowed, down nearly 30% last quarter. This is a very good indicator that Google Cloud could one day become a very profitable business and another mainstay of growth outside of digital ads.
It takes huge capital and technology requirements to participate, so it looks like the cloud infrastructure market will settle into an oligopolistic structure with three major players, Alphabet being one. Gartner predicts that more than 50% of total IT spending will go to the cloud by 2025, up from 41% in 2022, and that the total cloud industry will more than double over the next four years.
With a solid position in this fast-growing market, Google stands to benefit greatly from the transition to cloud computing over the next decade and beyond.
#3: Free Calling Options
Along with Alphabet’s core business, the company also has its “moonshot” segment called Other Bets. These companies are currently losing money and not producing much revenue, which significantly hurts the bottom line. But while these current services are dragging results today, any of them could become big business in the future.
Other Bets notably includes self-driving startup Waymo, which has been in pilot service for more than a year in Phoenix, Arizona. Another interesting company that aims to use technology to extend human lifespan is Calico. Meanwhile, Verily is a modernized health data science platform focused on breakthrough innovation.
The good news, as we’ll see below, is that the investing community doesn’t seem to place much value on these other bets. So they almost act like free call options on potential high upside breakouts.
#4: Artificial intelligence abounds
One thing to note about Alphabet is that it spends heavily on research and development for artificial intelligence (AI) applications. AI is quite relevant across all of Alphabet’s businesses, from search to ad networks to YouTube and the cloud.
During the recent analyst conference call, CEO Sundar Pichai explained how AI is driving new breakthroughs even beyond his core businesses, which could lead to great opportunities in the future:
[AI Innovations are] also fueling innovations beyond research. For example, DeepMind’s protein folding system, AlphaFold, was recently recognized by Nature & Science magazine as a breakthrough. To illustrate the magnitude of the team’s achievements, it took scientists more than 50 years to understand the structure of 150,000 proteins. The DeepMind team has now increased that number to 1 million, and they believe they will hit over 100 million this year.
As this major achievement indicates, AI not only powers Alphabet’s current business, but is also expected to continue to open up new business opportunities throughout the 21st century.
No. 5: It’s not expensive!
Finally, investors can get all these great companies at a very low price. Consider this: when you write off cloud losses and other bets, Alphabet’s for-profit businesses made $92 billion in operating profit last year, and $87.1 billion when factoring in all overheads of the business. That would equate to around $70 billion in net income.
Alphabet trades today at a market capitalization of $1.87 billion, but subtracting the company’s $140 billion cash surplus, its enterprise value comes to around $1.73 billion. dollars. Alphabet shares are trading today at about 24.7 times its core business earnings, adjusted for cash. It’s certainly not a high price to pay for Alphabet’s incredible ad, subscription, and hardware activity, which is collectively growing by more than 30%.
This excludes the cloud business, which is currently generating losses but likely has significant positive value, as well as other bets. Not only is Google performing at a high level today, but it’s practically a valuable stock at these levels.
While the upcoming stock split is nice, it’s not the main reason to buy this tech industry leader. It’s a great deal at a reasonable price, and one that never goes out of style.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.