Tech investors chased a lot of high-growth stocks with high valuations in 2020. However, that strategy backfired in 2021 as concerns about inflation and higher interest rates crushed many of those frothier growth stocks.
As investors fled the more speculative tech stocks, resilient stalwarts like Alphabet (GOOG -0.77%) (GOOGL -0.81%), the parent company of Google, became more attractive investments. Over the past 12 months, Alphabet's stock price rallied 66.8% as the S&P 500 advanced just 27.2%.
Alphabet's market-beating rally proves that the best investments are often hidden in plain sight, but is it too late to hop aboard that bandwagon?
Image source: Getty Images.
How fast is Alphabet growing?
Alphabet generated 80% of its revenue from Google's advertising services in 2020. Google's non-advertising businesses (including subscriptions and hardware) accounted for 12%, while another 7% came from Google Cloud.
Alphabet's total revenue rose 13% in 2020, even as the pandemic throttled the growth of Google's advertising business in the first half of the year. The growth of Google Cloud throughout the year also cushioned that blow.
Google's advertising business recovered in the second half of the year, and Alphabet's operating margin expanded from 21% in 2019 to 23% in 2020. Its diluted earnings per share (EPS) also grew 19%.
In the first nine months of 2021, Alphabet's revenue rose 45% year over year as Google's advertising and cloud business grew in tandem. Its operating margin expanded to 36%, while its diluted EPS jumped 124%.
Analysts expect Alphabet's revenue and earnings to grow 39% and 85%, respectively, for the full year. Next year, they expect its revenue and earnings to rise 17% and 4%, respectively, as the year-over-year comparisons gradually normalize in a post-pandemic market.
Why is Alphabet so resilient?
Alphabet's business is resilient because its ecosystem is practically inescapable. It owns the world's largest search engine, the most popular mobile OS (Android), the top web browser (Chrome), the leading streaming video platform (YouTube), and the most widely used webmail platform (Gmail).
Google accounted for 28.6% of all digital ad spending globally in 2021, according to eMarketer. Meta Platforms (META 0.63%), the parent company of Facebook and Instagram, ranked second with a 25.2% share.
Google and Meta's dominance of the online ad market enables them to generate plenty of cash and weather the constant regulatory challenges -- which include antitrust fines, privacy-related probes, and calls to break up their massive businesses. Their services will remain controversial, but businesses that need to promote their brands online will inevitably gravitate toward Google, Facebook, and Instagram before purchasing ads on smaller platforms.
Google controlled just 8% of the global cloud infrastructure market in the third quarter of 2021, according to Canalys. That puts it in third place behind Amazon (AMZN 1.25%) Web Services (AWS) (32%) and Microsoft's (MSFT 0.72%) Azure (21%), but it remains a viable alternative for companies that don't want to support Amazon's most profitable business or tether themselves to Microsoft's enterprise software and services.
Companies like PayPal, Twitter, and Home Depot already use Google Cloud, and it could gain even more customers by undercutting AWS and Azure's prices. Google can then offset those losses with its higher-margin advertising business. Google is also still keeping pace with its cloud rivals -- its cloud revenue rose 45% year over year in its latest quarter, compared to AWS' 39% growth and Azure's 50% growth in their latest quarters.
It's resistant to inflation and reasonably valued
Alphabet's advertising and cloud businesses were both well-insulated from inflation. Companies will still buy ads as their other expenses rise, and they'll keep paying Google Cloud to keep their websites and apps online.
Alphabet's stock trades at just 26 times forward earnings and less than seven times next year's sales, even though it's hovering near its all-time high. Those reasonable valuations indicate Alphabet could still have plenty of room to run in 2022 -- so it's certainly not too late to buy this evergreen tech stock.
