Alphabet (GOOG -1.50%) has proven quarter after quarter why it is one of the best businesses on Earth. The Google search engine, YouTube, and Google Cloud parent company has a nearly $2 trillion market cap, making it the third-largest company in the U.S.
During its fourth-quarter earnings report issued on Feb. 1, Alphabet announced an astounding $75 billion in revenue for the quarter and $257 billion for the entire year. These mind-boggling numbers become even crazier when the 32% quarterly and 41% annual year-over-year growth rates are accounted for.
Still, these fantastic results were overshadowed by management's announcement to split the stock 20-for-one. The nearly $3000 stock will begin trading for around $150 after the Fourth of July holiday in 2022. While a stock split does not affect the business, stocks often do well after announcing a split -- just look at Tesla's and Apple's performances during August 2020 after each company announced a split.
TSLA data by YCharts. (Tesla announced its split on Aug. 11, and Apple during its earnings.)
Despite this potential catalyst, I believe there are three stronger reasons investors should consider buying shares now.
1. Cash stockpiles and generation
As of Dec. 31, 2021, Alphabet had a jaw-dropping $139.6 billion in cash and marketable securities on its balance sheet and a mere $14.9 billion in debt. Having a war chest sitting around enables Alphabet to purchase whatever it wants. During its Q4 conference call, CEO Sundar Pichai mentioned looking into a blockchain solution for Web3 (which could fuel the metaverse). Alphabet may go shopping for a company to fulfill this desire -- and can make it happen with its resources.
Should Alphabet blow even half its cash on an acquisition, investors shouldn't fear; Alphabet will just generate more next year. Throughout 2021, Alphabet converted $67 billion of its $257 billion in revenue into free cash flow. If it doesn't spend its money on acquisitions, management may repurchase more stock -- they repurchased $50 billion throughout 2021. Regardless of what management decides, Alphabet's cash hoard and generation make it a fantastic investment.
2. The sun is starting to shine through Google's Cloud
In the battle for cloud computing supremacy, Google has not overcome Amazon Web Services' and Microsoft Azure's leads. However, Google Cloud is far from a lackluster segment. During Q4, its quarterly revenue grew 45% year over year to $5.5 billion and increased at a 47% clip throughout 2021. While Google Cloud still lost $890 million, much can be attributed to costs associated with expanding server infrastructure -- showing Alphabet hasn't given up on its cloud offering.
Image source: Getty Images.
Although Google Cloud may never overtake Azure or AWS, the deals Alphabet saw during Q4 should give investors hope. Management cited "backlog increasing 70% to $51 billion most of which can be attributed to Google Cloud" during its Q4 conference call. Additionally, it saw 80% growth in deal volume and a 65% increase in deals over $1 billion. Google Cloud is picking up steam, and investors should consider owning Alphabet's stock because of it.
3. Google and YouTube are category leaders
Alphabet owns two businesses with an insane market share in their respective categories.
| Segment | Market Share |
|---|---|
| Google Search Engine | 86% |
| YouTube | 76% |
Data source: Statista and Datanyze.
Because of their dominance, advertisers spend heavily on these platforms.
| Segment | Q4 2021 Revenue | YOY Growth |
|---|---|---|
| Google Search | $43.3 Billion | 36% |
| YouTube Ads | $8.6 Billion | 25% |
Source: Alphabet. YOY stands for (year over year).
Altogether, Alphabet's advertising segment brought in $61.2 billion and grew 33% with its Google Network division added in. These numbers lap 2020 COVID-suppressed revenue, and growth numbers will not be as impressive throughout 2022. But, advertising is not going away anytime soon.
Combined with its "Google other" segment, its services division ran at a 37% operating margin and remained the only profitable segment within Alphabet. Advertisem*nts keep the lights on at Alphabet headquarters, and with two premium advertisem*nt platforms, investors should be confident in these two segments' futures.
Alphabet is trading at an attractive 26 times earnings -- not too shabby for a company with 32% revenue growth.
GOOG PE Ratio data by YCharts.
The stock isn't anywhere near its valuation peak, even though it is close to setting all-time highs. And that should ease fears about buying a stock with inflated valuations, as 26 times earnings is nowhere near expensive for the company.
Alphabet is a strong buy regardless of which way investors view the stock. Those who hold onto the stock for three to five years will reap the benefits of a stock split, potential stock buybacks, an acquisition or two, and a lot of cash generated. Alphabet is a no-brainer stock. Even though it is near its all-time high, investors of all backgrounds could find a place for Alphabet in their portfolios.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, 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. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Keithen Drury owns Alphabet (C shares). The Motley Fool owns and recommends Alphabet (A shares), Amazon, Apple, Microsoft, and Tesla. The Motley Fool recommends Alphabet (C shares) and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
