Big tech keeps getting bigger. Two years since the start of the COVID-19 pandemic, the digital world is becoming a more important part of everyday life as businesses harness technology to get more efficient.
But with several tech conglomerates valued at more than $1 trillion, questions have arisen about how much sway they wield over the economy. Lawmakers and regulators are putting some of these powerful giants in their crosshairs, and Alphabet ( GOOGL -2.44% )( GOOG -2.33% ) is one of them. Is the stock a buy anyway? I say yes.
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A history of legal trouble
Alphabet's Google subsidiary has had plenty of run-ins with regulators over the years -- especially in the European Union. Google was fined the equivalent of $2.8 billion back in 2017 over anticompetitive activity, and another penalty was levied for $1.7 billion in 2019. A $5 billion fine from the European Commission is also pending a court case, which accuses Google of anticompetitive activity, specifically with its Android mobile operating system.
Legal troubles abound here in the states as well. The U.S. Justice Department, in collaboration with 36 state Attorneys General, filed an antitrust lawsuit in 2020 about Google's internet search advertising business. Preparations are being made for a court date in September 2023.
It's still too soon to tell what will become of all this regulatory activity. But some critics would like to see a breakup of Alphabet's internet empire, along with some other tech giants like Meta Platforms' ( FB -2.24% ) Facebook, Instagram, and WhatsApp. Surely such action would be game over for the stock, right?
Google is ubiquitous
Legal issues -- especially those that lead to multi-billion dollar fines -- aren't anything to welcome as an Alphabet shareholder. But I believe Alphabet is built to survive unlike any other titan of tech. Even a breakup of its individual businesses could, arguably, be a good thing for long-term shareholders (if you own Alphabet stock and plan to hold for the indefinite future). Here are three reasons.
1. Several of Alphabet's businesses could stand on their own
Google Search and its advertising empire is the obvious standout that could operate as its own entity. But YouTube would also prosper all by itself. YouTube is the world's most-watched internet streaming app, it's a social network, and it offers subscriptions to music and video. And then there's Google Cloud, the No. 3 public cloud provider behind Microsoft ( MSFT -2.71% ) Azure and Amazon ( AMZN -2.46% ) AWS. Google Cloud still operates at a loss, but it's growing fast (up 45% year over year in the fourth quarter of 2021), and it's making steady progress toward profitability.
2. Google is able to self-fund lots of projects
As one big cohesive entity, Alphabet has been highly profitable for years. Its operating profit was $78.7 billion in 2021, good for an operating margin of 30.6%. That includes some highly unprofitable business segments, including Google Cloud and the Other Bets segment (start-up stage companies like self-driving car outfit Waymo). Google Services, all on its own, generates even fatter margins. In Q4 2021, Google Services made an operating margin of 37.5% compared to an operating margin of 29.1% for the business overall. Google can use this cash to build new stuff, like a digital payments business, its Pixel smartphones and tablets, and smart home devices.
3. There's plenty of cash to go around
Suppose Alphabet gets busted up into individual pieces -- perhaps YouTube is broken from the rest of the Google empire. One question is the issue of finite resources. Will each individual entity have access to the capital, talent, and attention required to thrive independently? For Alphabet, I argue the answer is yes.
Each of Alphabet's segments (Google, YouTube, Google Cloud, and Other Bets) are enormous. And Alphabet has a massive balance sheet with the most net cash and short-term investment (net of debt) of any publicly traded company. At the end of 2021, cash and short-term investments were $140 billion, offset by debt of $14.8 billion. This kind of war chest would provide liquidity if its individual entities were set free.
Beyond recent market pressure on tech stocks, Alphabet has the additional distraction of unresolved antitrust lawsuits. But the internet search business and all its ancillary pieces are booming, and each is benefiting from long-term growth trends. Alphabet shares trade for 19 times one-year-forward expected earnings. With that kind of valuation, I believe the regulatory risk is priced in. Despite potential legal action stemming from Google's antitrust issues, I still think this cash-generating machine is a buy.
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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April 17, 2022 at 05:30PM
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Is Alphabet Stock a Buy Right Now? - The Motley Fool
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