One of the biggest winners from the coronavirus epidemic was Alphabet Inc. (NASDAQ:GOOG) (NASDAQ:GOOGL). Consumers who were confined to their homes resorted to their computers, and YouTube and Google’s search engine usage significantly surged.
But COVID is essentially a thing of the past, and challenging comparisons as well as heightened competition from TikTok, YouTube’s competitor, have some investors worried.
In fact, management issued a warning about the next quarter’s competitive environment. The business is still growing by double digits, though. Investors should also take into account the imminent stock split, the expanding but still losing Google Cloud company, as well as the several prospective companies in the Other Bets sector.
Examining the 1Q22 Results
On April 26, Alphabet released its 1Q22 results. The firm underperformed on both the top and bottom lines, producing earnings per share ($24.62 vs. consensus of $25.91) and sales ($68.01 billion vs. analysts’ expectations of $70.0 billion).
$54.66 billion was the total amount of advertising income, up from $44.68 billion in the previous year.
YouTube was the largest revenue thorn in the side. Nevertheless, year over year growth in YouTube advertising was 14%. Analysts anticipated the sector to generate $7.51 billion in advertising income, but YouTube only produced $6.87 billion. The miss was a result of services being suspended in Russia.
The $5.82 billion in Google Cloud revenue was higher than the $5.76 billion forecast for the quarter.
Cloud growth grew by 43% over the first quarter of the previous fiscal year. The cloud division’s operational deficit decreased from the $974 million loss posted a year earlier to $931 million. Currently, 8.5% of Alphabet’s overall income comes from Google Cloud.
The reported sales represented a 23% year over year growth, which was much lower than the Q121 growth rate of 34%.
Revenue from Alphabet’s Other Bets increased from $198 million to $440 million from the previous year. However, the deficit for that segment somewhat climbed to $1.15 billion.
Management emphasized the challenging comparisons with 2021, when customers were subject to constraints due to the coronavirus, and mentioned TikTok’s heightened competitiveness. Additionally, they anticipate a more difficult comparison in the following quarter, with adverse currency impacts acting as a hindrance.
How to Prepare for Google’s Upcoming Stock Split and Past Stock Splits
Google intends to divide its shares 20 to 1 on July 15th. For each share of the same class of stock an investor has on the split date, they will get 19 extra shares in the firm. This applies to holders of Class A, Class B, and Class C stock.
There have been two stock splits in Google’s history, but the first was a bit of an outlier and is thought to be the most contentious split ever. This is due to the fact that the main goal of the stock split was to create a new class of shares with less voting rights.
On March 27, 2014, Google issued stock to form class C shares, and that split took place.
Prior to the separation, only shares of Class A were traded publicly.
Following the split, the stock’s price increased little. The price of the shares fluctuated between $557 in March and a peak of about $580 in September. However, the stock was somewhat below the pre-split price in March of the following year.
On April 27, 2015, the business started a second, traditional split. In the month preceding the split, the stock had an average price of roughly $693 per share. It had dropped to about $770 by July, and within a year, GOOG had traded for almost $900.
Will the Split Increase the Price of Google’s Stock?
It goes without saying that a number of variables might affect a company’s share price after a stock split. However, a number of research show that share prices often increase after company splits.
In a research including over 1,300 businesses’ stock splits, David Ikenberry of Rice University found that shares of companies after splits outperformed similar firms by 16% after three years and 8% after one year.
Why Google Should Expand Even Further
In the near future, Google Cloud should offer a sizable cash source. The cloud sector has been losing money up to this point, but this is partly because management has made significant investments in the area.
By a significant extent, Google Clouds’ percentage revenue growth rates outpace those of AWS and Azure, and Google currently holds 10% of the worldwide market.
When past performance is examined, it seems that the cloud is where the business is going through an inflection point.
Operating losses of $4.3 billion in FY 2018 were followed by $4.6 billion and $5.6 billion losses in FY 2019 and FY 2020, respectively, for Google Cloud. The operational deficit was reduced to $3.1 billion in 2021, nevertheless.
In parallel, Google Cloud’s sales increased significantly, rising from $8.9 billion in 2019 to $13 billion in 2020 and slightly over $19 billion in 2021. Cloud alone recorded $5.8 billion in sales for the most recent quarter.
We saw over 80% rise in overall transaction volume for Google Cloud Platform for the entire year 2021 compared to the entire year 2020 and over 65% growth in the number of deals above $1 billion.
Is Google Undervalued as a Stock?
GOOG’s share price right now is $2,261.68. The 30 analysts that follow the stock have a combined average 12-month price objective of $3,323.07. The five analysts who graded the company after the most recent earnings announcement set an average price objective of $3,174 on it.
Yahoo and Seeking Alpha provide projected P/E ratios of around 20.5x. This is much less than the 28.18x average annual P/E over the previous five years.
While Yahoo gives a 5-year PEG of 0.83x, SA calculates the 5-year PEG at 0.99x. Both of those are well below the PEG average of 1.52x for the previous five years.
Is it best to buy, sell, or hold Google stock?
A growth stock, Google has been and continues to be. Take a look at Alphabet’s reported revenue for the first quarter of each of the last four fiscal years to see how quickly the business is growing.
The overall corporate revenues in Q1 2019 were $36.3 billion. That was followed by $41.1 billion in Q1 2020, $55.3 billion in Q121, and $68 billion in the most recent quarter.
This indicates that the firm grew at a faster rate between 2021 and 2022 than it did between 2019 and 2020.
Google Cloud will probably start to make money in the not-too-distant future thanks to the secular trend towards growing use of digital advertising.
In the meanwhile, it is conceivable that Waymo may eventually provide a cash stream, turning the moon shoots sector into a successful enterprise.
