• Mark Zil

4 Reasons to Buy Alphabet Before It Splits Its Stock

The tech giant is still a promising long-term investment.

On July 15, Alphabet (GOOG 0.01 percent) (GOOGL 0.04 percent), Google's parent company, will conduct a 20-for-1 stock split. This split will reduce Alphabet's trading price from around $2,300 to $115, but it will have no effect on its market capitalization or valuations.

Nonetheless, because of its lower price, Alphabet may attract more attention from retail investors. Because a single options contract represents 100 shares, it could also generate more liquidity through options trading. And its lower share price could lead to its inclusion in the price-weighted Dow Jones Industrial Average in the future.

Alphabet may appear to be a risky investment following its first-quarter revenue and earnings miss, but I believe it's still a great stock to buy ahead of the split for four simple reasons.

Its ad business is not immune to macroeconomic headwinds; it experienced temporary slowdowns during both the Great Recession and the COVID-19 pandemic, but it has always recovered from such downturns.

1. An unrivaled advertising firm

Alphabet generated 80 percent of its revenue in the first quarter from Google's advertising business (including YouTube). Its ad business is not immune to macroeconomic headwinds; it experienced temporary slowdowns during both the Great Recession and the COVID-19 pandemic, but it has always recovered from such downturns.

Between 2011 and 2021, Google's annual advertising revenue increased by 19.1%, from $36.5 billion to $209.5 billion. According to eMarketer, Google will control 27.7 percent of the digital ad market in the United States this year, putting it ahead of Meta Platforms (FB 0.51 percent) (24.2 percent) and Amazon (AMZN -1.48 percent) (13.3 percent), and will remain the market leader in most markets outside of China.

As a result, if you believe Google will weather the current macroeconomic headwinds, now is a great time to invest in its market-leading digital advertising business.

2. An ever-expanding and unstoppable ecosystem

Google's core business has expanded so quickly because its ecosystem is virtually unbreakable. It owns the most popular mobile operating system (Android), the most popular web browser (Chrome), the leading webmail service (Gmail), the leading online mapping service (Google Maps), and the largest free streaming video platform (YouTube). It also runs a growing number of complementary services such as YouTube Music, Google Workspace, Google Pay, and Google Photos.

Those digital tentacles constantly collect personal data from their users, which they use to better target advertisements across their ecosystem. This approach is divisive, particularly among privacy advocates and antitrust regulators, but it is extremely effective for advertisers.

3. A rapidly expanding cloud computing business

Google operates the world's third-largest cloud infrastructure platform, trailing only Amazon Web Services (AWS) and Microsoft Azure (MSFT -0.77 percent). According to Canalys, Google Cloud had an 8% share of the global market in the first quarter, while AWS had a 33% share and Azure had a 21% share.

Google Cloud will not overtake AWS or Azure anytime soon, but its revenue increased by 53% to $8.9 billion in 2019, 46% to $13.1 billion in 2020, and 47% to $19.2 billion (representing 7% of Alphabet's total revenue) in 2021. That is, it is growing faster than AWS and at a similar rate to Azure.

Google Cloud should grow in the long run as it attracts retailers who do not want to work with Amazon or be tethered to Microsoft's vast ecosystem of enterprise software. This growth should gradually lessen Google's reliance on its advertising business.

4. Rapid growth and a low valuation

Alphabet's size and diversification have allowed it to achieve rapid growth over the last decade. Analysts predict that revenue will increase by 15% in both 2022 and 2023. They anticipate a 1% drop in earnings this year as it increases spending, but a 19% increase in 2023.

They anticipate that Alphabet's annual earnings will grow at a 17 percent annual rate over the next five years. Long-term estimates should be taken with a grain of salt, but they give it a low 5-year price-to-earnings-growth (PEG) ratio of 0.8. Stocks with a PEG ratio less than 1.0 are considered undervalued, so Alphabet appears to be dirt cheap in comparison to its growth potential. In comparison, Meta and Amazon have PEG ratios of 1.2 and 3.0 over the next five years, respectively.

It is still a fantastic long-term investment.

Alphabet's stock price may suffer in the coming quarters as a result of investors' concerns about macroeconomic headwinds for advertising and the recent slowdown in YouTube ad sales.

But, as a long-term Alphabet investor, I'm not concerned about these short-term hiccups. I believe Google's platforms will continue to grow over the next decade, and that Alphabet's upcoming stock split will pique the interest of retail investors and options traders. Simply put, this tech behemoth remains a rock-solid investment in a volatile market.

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