Alphabet’s (GOOG, Financial)(GOOGL, Financial) revenue for calendar 2021 was $257 billion, a 41% improvement versus the prior year. Google’s primary earnings engine, its advertising business, grew 42% during this period, aided by 45% growth at YouTube, which generated revenue of nearly $29 billion for 2021. Google Cloud revenue also posted healthy revenue growth of 47%, reaching $19 billion for the year.
During this period, Alphabet expanded its margins dramatically to 31%, a level not seen for a full fiscal year in over a decade. Alphabet’s heavy investments in Google Cloud are beginning to bear fruit, with Cloud’s operating losses on a path to become operating profits in the near future. In the most recent quarter, Google Cloud posted an operating margin of -16%, compared to -32% in the year-ago quarter. Alphabet’s combination of rapid revenue growth and margin expansion resulted in a near doubling of diluted earnings per share for 2021 versus 2020.
Growth at this pace for a company of Alphabet’s size is nothing short of extraordinary. Alphabet is Sequoia’s largest position, and despite the 65.3% appreciation in the stock in 2021, the price to earnings multiple has actually contracted over the course of the year. If we give Alphabet credit for the cash on its balance sheet and add back losses from OtherBets, the business trades for an earnings multiple that is a modest premium to the market’s multiple. Alphabet is a far more defensible business than the average S&P 500 stock and continues to grow earnings far faster than the S&P 500 in aggregate.
From Ruane Cunniff (Trades, Portfolio)'s Sequoia Fund 2021 annual report.
