Alphabet Is The Best Value In Big Tech – Motley Fool

Alphabet, Inc (NASDAQ:GOOGL) is a worldwide digital advertising and cloud services company. The company operates in three segments; Google Services, Google Cloud, and Other Bets. The stock has gained 62% year-to-date and 276% over the past five years.

Source: Getty Images

We all know Google, right? Need a sports score? Google it. Migratory habits of penguins? Google it. Need to see Alphabet's financial statements? You got it -- just Google it. But some of us may not be clear just how and from where Google generates its revenues. The vast majority of their revenue comes from advertisements related to Google Search, as shown below in the disaggregation of the company's revenue for the first three quarters of 2020 and 2021.

When one searches on Google, the ads shown on top are often "pay-per-click" advertisements. This means that the advertisers bid for the top ad space, and then pay Alphabet whenever someone clicks on the ad. This is very effective advertising as consumers who perform a search are often ready to buy. As shown in the table above, Google makes 58% of its revenue from search advertising. This revenue was up more than 46% year-over-year for the first nine months of 2021. This is an impressive showing, however not as impressive as the 57% year-over-year gain made by YouTube ads. More and more consumers are cutting the cord each year and YouTube benefits from this trend in a major way.

The Google Cloud is an exciting element although it currently only makes up 7% of revenues. Google Cloud has a long growth runway and related revenue was up 48% year-over-year. The Cloud Services market is currently dominated by Amazon's (NASDAQ:AMZN) Amazon Web Services and Microsoft (NASDAQ:MSFT) Azure . However, the total addressable market for cloud infrastructure is expected to surpass $150 billion in 2021, a 37% increase over 2020. Amazon makes up 32% of the market and Microsoft 20%. After this, several companies jockey for position with Google leading at 9% market share. With the total market growing this year by more than 30%, this is a massive opportunity for growth for Google.

Revenues at Google continue to expand impressively and are expected to reach more than $254 billion for the 2021 fiscal year. This is an increase of 39% over the pandemic tempered 2020.

SOURCE: ALPHABET

As shown above, the pandemic led to tepid growth in 2020 which has roared back in 2021, effectively filling the gap. Over the past five years revenues have grown at a compound annual rate of 23%. Margins are also healthy with the company posting an EBITDA margin of 36% over the trailing twelve months and an operating margin of 30% over this time. Both are up from 2020 where the company posted 30% and 23%, respectively.

Of the Big Tech giants who are Google competitors, only Meta Platforms, formerly Facebook, (NASDAQ:FB) has more attractive valuation metrics. This is due to the recent whistleblower accusations against Meta Platforms which have caused the stock to swoon. Meta Platforms also makes the majority of its revenue from advertising, while Amazon and Microsoft compete with Google in the cloud and advertising markets.

SOURCE: YCHARTS

Google has a very reasonable forward PE of 26.5, shown above, which suggests there is still considerable upside in the stock, especially given the expected growth. The EV to EBITDA ratio is even more attractive at 16.8. This is due to the fortress balance sheet that Google maintains. The company had $142 billion in cash and short-term investments at last report with just $12.8 billion in long-term debt. The cash and short-term investments on hand represent a whopping 7.5% of the $1.88 trillion market cap.

Google has made tremendous gains in its core advertising business year-over-year and more is expected as we turn to 2022. Search and YouTube will continue to lead the way, however the company also has a tremendous opportunity in the cloud services segment. Margins are expanding and the company maintains an impressive balance sheet. Google is being overlooked by investors judging by its modest valuation ratios. All of this adds up to tremendous value and an exceptional opportunity for long-term investors to gain an edge.

This article represents the opinion of the writer, who may disagree with the official recommendation position of a Motley Fool premium advisory service. Were motley! Questioning 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 richer.

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Alphabet Is The Best Value In Big Tech - Motley Fool