Please ensure Javascript is enabled for purposes of website accessibility

3 Reasons Alphabet Is the Ultimate Value Stock of the Future

By Nicholas Rossolillo – Updated Aug 3, 2021 at 4:54PM

Key Points

  • Alphabet is growing its business on multiple fronts -- not just in the core advertising segment.
  • The company consistently generates a high rate of profitability.
  • A massive cash balance makes this a stable stock for the long haul.

Motley Fool Issues Rare “All In” Buy Alert

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

This is still one attractively priced tech giant after a huge second-quarter earnings report.

Alphabet (GOOGL -0.90%) (GOOG -0.84%) just obliterated expectations for the second quarter of 2021. Revenue was $61.88 billion, a whopping 62% increase from a year ago -- the period during the initial economic lockdowns when the Google parent reported its first year-over-year revenue decline ever.

The stock has now doubled since the start of 2020, but this is no overpriced tech titan. In spite of its imperfections, Alphabet is actually exhibiting some value stock characteristics, and it has a long road of investor returns ahead of it.

A smiling person sits next to a computer monitor and in front of a large background screen, both displaying code.

Image source: Getty Images.

1. Multiple profit centers and counting

Google search advertising helped lead the way toward the big revenue gain in the quarter. The segment increased 68% and hauled in a massive $35.85 billion in sales. But the company has multiple ways of generating revenue these days. YouTube ads grew 84% year over year, and Google Network ads were up 60% as marketing activity rebounded dramatically from the early days of the pandemic.

Meanwhile, Google Cloud grew sales 54% and is homing in on breakeven. Cloud operating losses came out to $591 million, a solid improvement from the $1.43 billion loss reported in the year-ago quarter. And "Google other" revenue (which includes various businesses like the Pixel hardware lineup, Google Play store, YouTube subscriptions, Google Pay, and more) was up 29% -- dragging down the overall growth rate but still a respectable showing.

At the moment, this is still a digital advertising company through and through. But Alphabet has successfully fostered multiple high-growth profit centers as part of its suite of services, a classic value-stock criterion that will help this company stay on its steady path.

2. A free-cash-flow machine

The Alphabet family isn't just growing the top line, though. It also churns out gobs of cash that it steadily returns to shareholders. In the second quarter, net income increased 166% year over year to $18.53 billion, while free cash flow also surged 91% to $16.39 billion. Based on those metrics, the stock currently trades for 29 times trailing 12-month net income and 31 times free cash flow -- not at all overpriced considering the profits and growth being generated.

Alphabet doesn't pay a dividend, but it does return plenty of capital in the form of share repurchases. The number of shares outstanding at the end of the second quarter was down about 2% from a year ago thanks to these buybacks, and management increased its program by $50 billion earlier this year. This certainly is no dividend income stock, but Alphabet is in the early stages of enhancing shareholder value by distributing some of its ample cash. Expect this policy to only grow more attractive over time.

3. Even with its flaws, Alphabet is a fantastic long-term bet

Like every great value stock, this one has its imperfections. In this case, Alphabet is facing constant legal battles over anticompetitive practices, and antitrust lawsuits could eventually break up the tech giant into smaller pieces. However, steady cash flow generation and an incredible cash stockpile make this the ultimate value stock -- even considering the potential legal issues.

Specifically, cash and marketable securities on hand of $135.87 billion (offset by debt of only $14.33 billion) help gloss over the flaws. Of all the tech behemoths out there, Alphabet has the largest cash hoard. If the company is forced to split up someday (even if successful, the court cases would likely take years), there is plenty of net cash to arm each of the pieces of the Alphabet empire (Google search, Google Cloud, YouTube, etc.) with plenty of money to ensure their future success. Even on their own, they would remain formidable tech investments.

Alphabet had a great second quarter, but there's still lots of sustainable growth left in the tank here as multiple secular growth trends like digital ads, cloud computing, and online entertainment propel the business higher. This is the ultimate value stock of the future.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Nicholas Rossolillo and his clients own shares of Alphabet (C shares). The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Alphabet (A shares) Stock Quote
Alphabet (A shares)
GOOGL
$95.19 (-0.90%) $0.86
Alphabet (C shares) Stock Quote
Alphabet (C shares)
GOOG
$95.44 (-0.84%) $0.81

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
351%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.