Here’s a growth stock that I think is a ‘no brainer’ buy for my portfolio. Alphabet (NASDAQ:GOOGL) stock returned 675% in the last decade and is a dominant name across the internet. But 2022 has been — and may continue to be — a rocky year for Google’s parent company and its share price.
However, the global behemoth should be able to easily ride out any economic slowdowns. I see this as a great opportunity for me to buy a quality company at a discount. Here are four reasons why I’ve been buying.
1. Stock split
Alphabet’s 20-1 stock split happens on July 15. While this won’t change its overall market value or capitalisation, it could create value for shareholders indirectly. Firstly, retail investors may find a share price of $110 more attractive/affordable than the current level of around $2,200. This will particularly be the case for those using a broker that doesn’t offer fractional shares. Secondly, the lower share price could lead to Alphabet’s inclusion on the Dow Jones Industrial Average. As this index is widely followed by institutional investors, funds that track it would need to buy Alphabet stock, giving it a short term tailwind. But the long-term growth is coming from elsewhere.
2. Google Cloud Platform
That long-term growth could come from Google Cloud. This business currently accounts for 7% of Alphabet’s total revenue, approaching $20bn. It’s the third-largest cloud infrastructure platform globally, behind Amazon Web Services (AWS) and Microsoft Azure. It’s only a distant third with an 8% market share, while AWS and Azure have a combined 55%. However, Google Cloud grew 53% in 2019, 46% in 2020 and 47% in 2021. If this trajectory continues, Alphabet will be less reliant on its core advertising business.
3. Advertising juggernaut
Not that its ad business is a bad thing. Over the last decade, it has boasted an average annual growth rate of more than 19%. In the first quarter of 2022, it accounted for around 80% of Alphabet’s total revenue. Remarkably, in Q4 2021, Alphabet-owned Youtube’s revenue alone was $900m higher than that of Netflix. Youtube’s monthly active users should be relatively recession-proof too. As inflation bites, many may cancel their paid subscription streaming services, but continue enjoying Youtube’s free ad-based platform.
There are macroeconomic headwinds facing most businesses, of course. And Alphabet won’t be immune to these challenges if advertisers cut spending. Additionally, its near monopoly on search and dominance across the internet makes the business an antitrust target. There’s a possibility that regulators could push to break up Alphabet for suppressing competition. Excluding this, I think its stranglehold on ad revenues should continue.
4. Cash flow machine
The S&P 500 index has entered bear market territory, down 20% for the year. In this environment, I’m trying to invest in ‘quality’ businesses. I believe Alphabet falls under that category despite underperforming the S&P this year. That’s because the business possesses the desirable combination of high returns on capital and high growth. Its strength in advertising helped generate $67bn in free cash flow last year. Revenue is forecast to grow 15% year on year in 2022 and another 15% in 2023. The current price-to-earnings ratio of 20.8 is its lowest valuation in a decade. Consequently, the stock looks great value to me. I’m buying.
