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3 Catalysts for Google in 2021

By Nicholas Rossolillo - Dec 23, 2020 at 8:15AM

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An antitrust case won't be one of them next year.

Alphabet's ( GOOGL 0.62% )( GOOG 0.46% ) Google has been under fire. In spite of its work organizing the world's data and being a "helpful" tech company, it was a tough year for online advertising because of the pandemic. An antitrust lawsuit was also filed, claiming Google has taken part in anticompetitive activity to maintain its lead in internet search. 

The trial isn't expected to occur until the autumn of 2023, though, which means it's more or less business as usual for Google in 2021. Here are the three catalysts that will dictate whether the stock can continue its relentless rise in the next 12 months. 

1. An easy lap for ad sales

Advertising often takes a hit during recessions, and 2020 was no exception. In the midst of the lockdown to halt the spread of COVID-19, many businesses hit the brakes on marketing campaigns. Google's digital ad empire wasn't immune. Ad sales have slowed in the last year and even declined year over year during the spring -- though they quickly snapped back to growth mode over the summer.

Period

Google Ad Revenue

Year-Over-Year Increase (Decrease)

2019

$135 billion

16%

Q1 2020

$33.8 billion

10%

Q2 2020

$29.9 billion

(8%)

Q3 2020

$37.1 billion

10%

Data source: Alphabet.

Google is a massive business. Its sheer size alone should dictate slower growth in its primary ad business. However, digital advertising overall is still in the process of replacing traditional marketing and could reach some $1 trillion in global annual spending by 2030 (up from some $320 billion expected in 2020). 

Though Google is coming under increased pressure from competition and regulatory scrutiny, its core business still operates in a growing industry. As it laps effects from COVID-19 -- especially in the first half of 2021 -- Google's ad-sales growth rates could accelerate.

Someone pictured in the background pressing an illustrated internet search bar in the foreground.

Image source: Getty Images.

2. Playing catchup to its public cloud peers

Google isn't just about ads anymore, though. It's also a fast-growing player in the cloud-computing market. Cloud revenue made up 7.5% of Google's total revenue during Q3 2020, although it trails behind leaders Amazon ( AMZN -0.00% ) and Microsoft ( MSFT 0.01% ) in size. 

But at current growth rates, Google could play a serious catch-up game in 2021. Cloud grew 45% year over year in Q3 to $3.44 billion, and the company hasn't been shy about wanting to keep that trajectory going. Amazon's AWS segment hauled in $11.6 billion in Q3 2020 but grew "only" 29% year over year. In its comparable quarter, Microsoft's "Intelligent Cloud" segment (which includes Azure) grew 20% to $13 billion. Google is clearly making some headway expanding its presence in modern IT infrastructure and services.

More important than the growth, though, is profitability for Google Cloud. Company CEO Sundar Pichai said Cloud will be reported as a stand-alone segment starting in the fourth quarter of 2020.

Since Alphabet has been investing heavily in Google Cloud, it's expected the segment still operates at a loss. However, as it continues to expand and reaches a more efficient scale, look for Cloud to become a meaningful contributor to Google's overall profitability next year. After all, AWS comprises a majority of Amazon's total operating profits. Google could get a massive boost from Cloud, too, as it expands. 

3. Other and moonshot businesses start to pay off

Something similar could take place with Google's "Other Bets" collection of start-ups. For clarification, this is different from "Google Other," the large and growing segment (revenue of $5.48 billion, up 35% in Q3 2020) including YouTube TV and Music subscriptions, Pixel and Nest hardware, and Google Play store app sales. "Other Bets," by contrast, are small operations attempting to disrupt big industries.

Some of these start-ups are well-known, like autonomous-vehicle company Waymo and life-sciences researcher Verily. During the third quarter, Other Bets generated just $178 million in revenue but racked up $1.1 billion in operating losses. It's a big number that Google is able to absorb, thanks to its highly profitable search-based ad bread and butter.

However, some of these moonshot companies could be nearing more mainstream commercialization -- like, for example, self-driving vehicles and life-science research. If these companies start to make that transition from start-up to viable business, Google could experience further transformation from internet search ad company to a more diversified technologist. 

Even in a less-than-ideal year for digital ads and continual investment into high-growth segments like Cloud and a myriad of start-ups, Google generated operating income of $25.6 billion through the first three quarters of 2020 -- good for an operating profit margin of 25.6%. A rebound in growth in ads and its smaller segments reaching more efficient scale could send profits even higher in 2021. Those catalysts could keep the stock flying high in the new year.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,963.73 (0.62%) $18.34
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$334.97 (0.01%) $0.05
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$3,523.16 (-0.00%) $0.13
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$2,974.41 (0.46%) $13.68

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