Alphabet dominates the online search market with 80%-plus global share for Google

Business Strategy & Outlook

Alphabet dominates the online search market with 80%-plus global share for Google, via which it generates strong revenue growth and cash flow. The continuing growth in the firm’s cash flow, as Google will maintain its leadership in search. YouTube contributes more to the firm’s top and bottom lines, and the investments of some of that cash in moonshots as attractive. Whether they will generate positive returns remains to be seen, but they do present significant upside. Google’s ecosystem strengthens as its products are adopted by more users, making its online advertising services more attractive to advertisers and publishers and resulting in increased online ad revenue, which will continue to grow at double-digit rates after the pandemic and during the next five years. The firm utilizes technological innovation to improve the user experience in nearly all its Google offerings, while making the sale and purchase of ads efficient for publishers and advertisers.

Adoption and usage of mobile devices has been increasing. The online advertising market has taken notice and is following its target audience onto the mobile platform. Google partakes in this on the back of its Android mobile operating system’s growing market share, helping it drive revenue growth and maintain its leadership in the space. Among the firm’s investment areas, it is particularly applauding the efforts to gain a stronger foothold in the fast-growing public cloud market. Google has quickly leveraged the technological expertise it applied to creating and maintaining its private cloud platform to increase its market share in this space, driving additional revenue growth and creating more operating leverage, which will continue. Most of Alphabet’s more futuristic projects are not yet generating revenue, but the upside is attractive if they succeed, as the firm is targeting newer markets. Alphabet’s autonomous car technology business, Waymo, is a good example: Based on various studies, it may tap into a market valued in the tens of billions of dollars within the next 10-15 years.

Financial Strengths

Alphabet has a very strong balance sheet with cash and cash equivalents of nearly $140 billion and total debt of nearly $15 billion at the end of 2021. The company also has a $4 billion revolver with no outstanding balance. Over 60% of the company’s cash and cash equivalents is held outside the U.S. The company generated $92 billion cash from operations in 2021, up 41% from 2020. The cash from operations to grow 17% annually through 2026. While continuing strong top-line growth, the firm continues to invest in innovation. Alphabet’s free cash flow to equity/gross revenue ratio averaged 23% over the past three years, which indicates strong operational and financial health. A five-year model average FCFE/sales ratio of 26% through 2026.

Bulls Say

As the number of online users and usage increase, so will digital ad spending, of which Google will remain one of the main beneficiaries.
Android’s dominant global market share of smartphones leaves Google well positioned to continue generating top-line growth as search traffic shifts from desktop to mobile.
The significant cash generated from the Google search business allows Alphabet to remain focused on innovation and the long-term growth opportunities that new areas present.

Company Description

Alphabet is a holding company. Internet media giant Google is a wholly owned subsidiary. Google generates 99% of Alphabet revenue, of which more than 85% is from online ads. Google’s other revenue is from sales of apps and content on Google Play and YouTube, as well as cloud service fees and other licensing revenue. Sales of hardware such as Chromebooks, the Pixel smartphone, and smart home products, which include Nest and Google Home, also contribute to other revenue. Alphabet’s moonshot investments are in its other bets segment, where it bets on technology to enhance health (Verily), faster internet access to homes (Google Fiber), self-driving cars (Waymo), and more. Alphabet’s operating margin has been 25%-30%, with Google at 30% and other bets operating at a loss.

(Source: Morningstar)

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