Google parent Alphabet (GOOG -1.10%) (GOOGL -1.23%) recently announced it would be splitting its stock 20-for-1 later this year. As a result, individual shares will become a lot more affordable for those without the ability to buy partial shares.
Stock splits don't do anything to increase or decrease the underlying value of the business. However, they have traditionally been associated with bullish price action and positive sentiment on the part of management.
A company splitting its stock is the last reason to buy shares. Investors should always focus on business fundamentals and business value, not the mere share price. Yet for Alphabet, there are a lot of fundamental reasons to own shares well beyond the stock split.
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No. 1: Search: The best business in the world?
Google has a practical monopoly in online search, which may be the greatest business of all time. According to Oberlo, Google garnered a 91.4% market share of the global search market. With that much scale, Alphabet can afford to invest what it needs to widen its moat against rivals, while also raking in tremendous profits.
Even more than 20 years after launching its search engine, Alphabet's growth isn't letting up. In the recently reported fourth quarter, Google's search business grew a stunning 36% -- an incredible rate for a business that made over $43 billion in revenue just in Q4 alone.
Unlike other social-media stocks that have been struggling, Google Search is less susceptible to recent iOS operating-system changes that have enhanced privacy at the cost of lowering ad targeting capabilities. Perhaps that's why Alphabet's digital-ad revenue came in strong last quarter, likely taking share from social-media stocks that have had to adapt to the new landscape.
Alphabet can also use data from Google Search to fuel recommendations for YouTube, its entertainment-content platform that also saw incredibly strong 25% growth last quarter.
No. 2: Cloud, cloud, cloud
If Search weren't the greatest business in the world, another strong candidate would be cloud infrastructure. Although Alphabet was a late entrant into the cloud-computing market, it seems to have solidified a third-place position in this highly attractive industry. Last quarter, Google's cloud segment surged 44.6% on a $22 billion annual run rate, which is really impressive.
Google Cloud is still losing money, but operating losses have been narrowing, down nearly 30% in the last quarter. That's a very good indicator that Google Cloud could one day become a very profitable business and another core leg of growth outside of digital ads.
It takes tremendous capital and technology requirements to participate, so it looks as though the cloud-infrastructure market will settle into an oligopoly structure with three main players, Alphabet being one. Gartner predicts that more than 50% of total IT spend will go to the cloud by 2025, up from 41% in 2022, and the total cloud industry will more than double over the next four years.
With a solid position in this high-growth market, Google should benefit handsomely from the transition to cloud computing over the next decade and beyond.
No. 3: Free call options
Aside from Alphabet's main businesses, the company also has its "moonshot" segment called Other Bets. These businesses are currently losing money and don't produce much revenue, and are thus a big drag on results. But while these current services are a drag on results today, any one of them could turn into a big business in the future.
Other Bets most notably includes the autonomous-driving start-up Waymo, which has been in a pilot service for over a year in Phoenix, Arizona. Calico is another interesting venture that aims to use technology to extend the human lifespan. Meanwhile, Verily is a modernized health-data science platform focused on breakthrough innovation.
The good news, as we'll see below, is that the investing community doesn't seem to be ascribing much value to any of these other bets. So they almost act as free call options on potential high-upside breakthroughs.
No. 4: AI upside abounds
One thing to note about Alphabet is that it spends a huge amount on research and development for artificial intelligence (AI) applications. AI is quite relevant across all of Alphabet's businesses, from Search to ad networks to YouTube to Cloud.
On the recent conference call with analysts, CEO Sundar Pichai illuminated how AI is leading to new breakthroughs even beyond its core businesses, which could lead to big opportunities in the future:
[AI Innovations are] also powering innovations beyond Search. For example, DeepMind's protein-folding system AlphaFold was recently recognized by Nature & Science Magazine as a defining breakthrough. To illustrate the scale of the team's achievement, it took scientists more than 50 years to figure out the structure of 150,000 proteins. The DeepMind team has now expanded that number to 1 million, and they think they will get to more than 100 million this year.
As indicated by this seminal achievement, AI not only powers Alphabet's current businesses, but should also continue to open up new business opportunities throughout the 21st century.
No. 5: It's cheap!
Finally, investors can get all of these great businesses for a low, low price. Consider this: When you back out the losses from Cloud and Other Bets, Alphabet's profit-making businesses made $92 billion in operating income last year and $87.1 billion when accounting for all corporate overhead. That would equate to about $70 billion in net income.
Alphabet trades at a $1.87 billion market cap today, but when subtracting out the company's excess $140 billion in cash, its enterprise value comes to just about $1.73 billion. Alphabet's stock today trades at just about 24.7 times trailing earnings on its core businesses, adjusted for cash. That's certainly not a high price to pay for Alphabet's amazing core ad, subscription, and hardware businesses, which are collectively growing 30%-plus.
That excludes the cloud business, which is currently generating losses but likely has significant positive value, as well as Other Bets. Not only is Google executing at a high level today, but it's practically a value stock at these levels.
While the upcoming stock split is nice, it's not the main reason to buy this tech-industry leader. It's a great business at a reasonable price, and that never goes out of fashion.
