Are Google shares significantly undervalued?

Google shares reached their all-time high yesterday. Is the stock still significantly undervalued, or will we see a share price fall soon?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Google’s parent company Alphabet (NASDAQ: GOOGL) has put on a stellar performance so far this year. As one of the FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google), it has one of the largest market caps in the world at $1.8trn. These companies are now individually richer than most countries on Earth. Google shares reached an all-time price high of $2,736 yesterday, and I predict the stock could easily rise further.

Second-quarter earnings

Alphabet released Q2 earnings on 27 July. The stock leapt 3% as every Alphabet division reported record growth. Overall revenue came in at $61.9bn for the quarter. This was 62% higher than the same quarter last year, thrashing analyst expectations. Profits more than doubled to $18.5bn. CEO Sundar Pichai believes that this record growth was largely due to “a rising tide of online activity in many parts of the world.” 

Search and advertising 

Google’s core business is Google Services, which incorporates search and advertising. Even with a slowdown in global advertising spending, it was still able to massively grow revenue. Google Services generated $22.3bn in Q2 income, yielding an operating profit margin of 39%. In the same quarter in 2017, the margin was 29%, meaning that Google Services has increased profitability by 10%. As the business grows, I think margins are likely to become even more profitable, making Google shares significantly undervalued.

Google Services also includes YouTube, with advertising revenue up 84% in Q2 to $7bn. YouTube creators were paid more money in Q2 than in any previous quarter, and Alphabet is investing heavily to shrug off competition from the likes of Facebook-owned Instagram. With YouTube comprising only 11% of overall revenue, there is plenty of room for growth. However, as the world comes out of lockdown, it seems unlikely that this meteoric rise can continue. 

Google Cloud

The growth of Google Cloud is another success story, with Q2 revenue increasing 54% to $4.6bn. The division now makes up 7.5% of total Alphabet revenue. Very few companies have the financial clout to set up secure cloud computing services. Google will therefore find plenty of market space to expand, even competing against the likes of Amazon and Microsoft. It’s worth noting that Google Cloud still made a loss of almost $600m in Q2, so I believe future increased profitability of Google shares is a bet on out-competing other services. 

Time to buy Google shares?

As a long-term investor I value diversification of risk in my portfolio. Alphabet is also investing in AI through its DeepMind division, and in self-driving cars through Waymo. While these divisions are currently loss-making, Alphabet has the resources to absorb losses for the possibility of future returns.

The company completed $24bn of share repurchases in the first half of 2021, driving publicly available shares from 696m in 2019 to 667m today. It’s also cash rich, with a reported balance of over $100bn. There’s plenty of momentum behind its all-time share price high.

There are risks though. Competitors are always nipping at its heels. There’s also potential legal hurdles to clear, with anti-trust lawsuits that could see the company broken up into smaller pieces. Its share price has plenty of room to fall. However, Google shares are still significantly undervalued for me.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Charles Archer owns shares of Alphabet (C shares), Amazon, and Netflix. The Motley Fool UK owns shares of and has recommended Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Facebook, Microsoft, and Netflix. The Motley Fool UK has recommended the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »