The market looks as if it will experience another downturn soon: inflation remains a huge danger to the US economy. Jerome Powell’s statement last week signaled that the market should expect additional interest rate hikes in 2022. Due to robust free cash flow, aggressive stock buybacks, and an increasingly diversified business model, Alphabet Inc. (NASDAQ:GOOG, NASDAQ:GOOGL) (“Google”) is well positioned to ride out the present market turbulence. Google’s Cloud business, in particular, has the potential to produce high cash flow growth in the future, assisting the technology corporation in offsetting some of the decreases in the advertising industry.
Since Google shares have fallen around 10% since mid-August, I feel the risk profile (and pricing) are pretty appealing right now!
Google Uniquely Positioned to Ride Out Cyclical Advertising Down-Turn
TikTok is a rising challenge to traditional US social media businesses because advertisers are pulling back in a market that has grown less predictable due to high inflation and declines in corporate ad-spend. Many digital businesses, including Snap (NYSE:SNAP) and Meta Platforms, have warned of a decline in the advertising industry (NASDAQ:META). Bytedance owns Tik-Tok and has made inroads with younger users in the United States. It was the most downloaded app in Apple’s App Store in Q2’22, with 60 million downloads.
The growth of TikTok has had the greatest impact on Facebook. The business was hugely disappointed with its Q3’22 revenue prediction, partly due to TikTok’s success in drawing younger users, who advertisers highly want. While advertising continues to generate the majority of Google’s income (81% in Q2’22), the technology giant provides investors with something that other ad-heavy technology firms may not: a possible counterbalance to a slowdown in the advertising sector.
Google’s cloud business is gaining traction as more workloads migrate to the Cloud and companies invest more in IT infrastructure and scalability. Google’s Cloud division increased sales 36% year on year to $6.28 billion in Q2’22, assisting the firm in overcoming revenue issues in an increasingly tough advertising environment. However, Google is not the market leader in Cloud. Amazon.com, Inc.’s (NASDAQ:AMZN) Web Service leads the market with 34%, followed by Microsoft’s (NASDAQ:MSFT) Azure, which has 21%. Google ranks third in the market, with a market share of about 10%.
As more workloads migrate to the Cloud, businesses and retail customers will drive demand for Google’s cloud-based services in the future. According to Synergy Research Group, business expenditure on Cloud services will hit $178 billion in FY 2021, a 37% growth year on year. While Microsoft has had the fastest rise in Cloud market share in the previous four years, which is a significant incentive to acquire the software firm, Google has also made consistent progress, increasing its market share from 6% to 10% over four years in Q4’21. Google Cloud hasn’t expanded its market share as swiftly as Microsoft’s Azure. Still, with 36% revenue growth in Q2’22, Google remains a significant player in the industry.
$70B Stock Buyback Creates Support for the Stock
Google has authorized the buyback of $70 billion in market shares, representing nearly 5% of the technology company’s entire market valuation. The $70 billion authorization followed a $50 billion authorization the previous year, and Google generated a lot of free cash flow to pay for it. Google has quarterly free cash flow margins of 20-30% and has averaged $16.3 billion in quarterly free cash flow (“FCF”) in the previous year. The $70 stock buyback offers support for Google shares. Given that Google is cheaper than a year ago, stock buybacks are an excellent investment opportunity for management.
Risks With Google
The most significant commercial risk for Google is an unexpected slowdown in the Cloud business, which could result in market share loss to Amazon Web Services and Microsoft Azure. Google is the third-largest Cloud provider in the United States, with consistent market share growth over the previous four years, putting the technology business in a solid position to boost revenues swiftly. However, if Google loses momentum in the Cloud market and the ad company has a cyclical downturn, shares may revalue lower.
Final Thoughts
Alphabet is still an advertising-dependent company, with an ad revenue share of 81%, but this will change in the future. As business client adoption of Cloud services expands, I believe Google is well positioned to weather the digital advertising industry downturn. Alphabet stock is a buy-once-and-forget investment due to the company’s massive free cash flow, great prospects for development in the Cloud sector, and stock buybacks. I feel that Google’s earnings-based valuation is incredibly appealing for long-term investors. The risk profile is significantly weighted to the upside following a near-10% loss! The more it falls, the more valuable Google becomes.
Featured Image: Megapixl @Toxawww
