Google’s Earnings Blockbuster Proves Its Primacy
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The world’s best company is being built in plain sight. And there is nothing that regulators, politicians or propogandists can do about it.
Executives at Alphabet (GOOGL) reported on Tuesday that profits in the fourth quarter reached $20.6 billion, up more than a third. Then they threw in a 20-for-1 stock split. This is getting good.
We have recommended Alphabet in our Digital Transformation portfolio since April 2020 and are up 115% since. Yet there is clearly more to come.
Long-term investors should own Alphabet shares despite the big run to date. Let me explain.
Tech journalists love to hate Alphabet, the parent company of Google. It’s a big change in perception. The Mountainview, Calif.-based company began in the 1990s as a favorite among reporters. They loved the utility of Google search and YouTube. Back in the day Google was the upstart, battling against the establishment of Yahoo and Lycos. Then executives figured out how to make money for shareholders, lots of it.
The competitive advantage at Alphabet is executives hire the best people to build software that people actually want to use. It started with search, email, Internet browsers, and online videos, via YouTube. Then they gave it all away for free.
That’s the rub. Haters these days say those tools, that they all still use by the way, are not free. Detractors say the Google part of Alphabet is scraping personal data and selling that information to advertisers.
This is preposterous. It is not how advertising works. It’s also a childish view of the world where large corporations give away free stuff without any strings attached.
Alphabet, and the rest of big tech, including Apple (AAPL), Microsoft (MSFT), Amazon.com (AMZN), Meta Platforms (FB), Nvidia (NVDA) and Tesla (TSLA) are winning despite the critics because they build stuff that their patrons absolutely love. And all of these businesses continue to grow quickly.
However, the potential of Alphabet is head and shoulders above all of the rest. In an era of data science, Alphabet is the undisputed leader because they attract the best talent.
Executives enlisted Google Mind, its wholly owned artificial intelligence division to begin work in 2017 to better monetize YouTube. The engineers soon discovered that users would be OK viewing far more ads if they were unfolded inside the video, as opposed to the beginning. Today YouTube is a bigger business than Netflix (NFLX), and growing faster too.
The official Q4 financial statement shows YouTube logged $8.6 billion in sales, up 25%. Netflix posted revenues of $7.7 billion over the same period, up 16%.
The same game plan has been ramped up at Google Cloud. Although Google began life as a cloud-first business, executives didn’t begin selling its excess data storage and computer processing until 2008. By that time the company was way behind Amazon Web Services and Microsoft Azure, the cloud business out of Redmond.
Thomas Kurian came on as chief executive in 2019. The former Oracle executive immediately got to work hiring staff.
During the Q4 conference call with analysts Tuesday Sundar Pichai, Alphabet’s chief executive explained that the company backlog increased 70% to $51 billion, on the strength of new business at Google Cloud. Deals over $1 billion in annual billings increased 65%. For the quarter cloud revenue soared to $5.5 billion, up 45%.
There is a pattern. Alphabet hires the best people to help build software customers love.
It’s a strategy that works. Alphabet hired 6,500 new full-time staff during Q4. The official headcount is now 156,500. The hires reveal confidence in the direction of the business and future prospects.
The same is true of the 20-for-1 stock split. Some media talking heads will go out of their way to argue that stock splits to not impact the financial underpinnings of the business. This is true, and it misses the point. Stock splits tell investors, and potential new hires that management is confident the share price will continue to rise as future products come to market.
At a price of $2,552.88 shares trade at 24.6x forward earnings and 7.4x sales. This is cheap given the growth of YouTube and Google Cloud.
Long-term investors should look for an entry point in coming weeks.
