Google’s parent company, Alphabet (GOOG, Financial)(GOOGL, Financial), has been chasing Apple (AAPL, Financial) for a while now to become the world’s largest company in terms of market capitalization. Alphabet is now worth more than $650 billion, and it trades around 7 times sales and 32 times earnings, compared to Apple’s market cap of more than $750 billion, trading around 3.5 times sales and 17 times earnings.
Despite Apple’s higher valuation, it is clear that the market expects Alphabet to grow much faster than Apple, which has been the case for the past few years. Alphabet continues to grow at strong double-digit rates as the company races toward $100 billion in annual revenues. Alphabet took a mere 10 years to move from $16.5 billion in annual revenues in 2007 to $90.27 billion in 2017.
The growth has been stunning, and the best part is that it is far from over. Alphabet’s revenues grew 22% during the first quarter of 2017 compared to last year. How often do you come across a company with more than $20 billion in quarterly revenues that’s able to post above 20% growth rates. There are several things that are working in favor of Alphabet, as it continues to rack up advertising dollars.
In the digital advertising world, only Facebook (FB, Financial) is slowly becoming a worthy competitor. Google’s dominant position in search engine land and mobile operating systems has made sure that traffic keeps flowing through the company’s servers, and there is no clear alternative platform that is in a position to challenge Google on the advertising front.
U.S. digital ad spend has been grown at a CAGR of 17% since 2005 while Google’s annual revenues grew at a CAGR of 21% between 2007 and 2017. Google, as the No. 1 player in the digital advertising market with a global presence, was able to grow a little faster than the industry in the U.S.
What’s more, the digital advertising world is not yet done growing. Though the amount of time we spend online has considerably increased over the years, people still spend time in front of their television sets. Digital inched ahead of TV ad spending in 2016 and is expected to walk away with all the future growth in the next few years.
It’s absolutely possible for digital advertising spend to completely wreck traditional advertising mediums as more people spend an increasing amount of time with their digital devices. If digital advertising in a mature and highly developed market like the U.S. is expected to grow at double-digit rates, the opportunity in developing countries will be huge.
And the digital revenue growth trend will only slow after internet penetration in developing countries reaches much higher levels, in line with the developed world, which will take many more years to happen. The growth runway for Google is huge and, considering the size of the industry, there is enough space for two big players, Facebook and Google, to keep growing along with the market.
It’s not really a surprise that Alphabet continues to trade at 7 times sales and more than 30 times earnings. There is a clear case for future growth, which is not necessarily the case with Apple at this point.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
