Alphabet Inc. (GOOG, Financial) (GOOGL, Financial) was almost flat in 2016, but the stock has displayed positive signs of upward momentum this year. The stock is up nearly 19% year to date.
As of the first quarter, Google was responsible for 99% of Alphabet’s overall revenue, whereas other Alphabet activities brought just 1% of the income. In turn, nearly 87% of Google’s revenue was derived from its advertising business whereas nonadvertising division accounted for the rest of 13%.
According to a forecast report from Statista.com, worldwide digital advertising spending is projected to reach $229.25 billion by the end of this year, up significantly from $194.6 billion in 2016. Virtually all of that growth will be distributed between two dominating players: Google and Facebook (FB). This growth reflects marketers’ belief in the internet’s power to connect with potential customers.
Although Facebook’s revenue from digital ads continues growing at a healthy rate, it still lags far behind Google. Facebook has been stepping up efforts in video to compete efficiently with Google’s YouTube subsidiary.
Google’s YouTube currently has over 1.5 billion viewers watching more than an hour of video every day on their smartphones alone. Moreover, the company recently launched its new YouTube TV, a live and on-demand streaming service that will upend cable.
The subscription service cost $35 per month and offers up to six accounts per plan. The service allows access to up to 40 networks, along with YouTube creator content. The company is aggressively focusing on more televisionlike content in an effort to surge users' engagement even more. YouTube has already produced nearly 40 original shows as well as movies for its YouTube Red service.
Recently, YouTube offered a glimpse into 12 new originals coming up in the second half of this year. Also, the company is producing some original content for its ad-supported platform. Google is willing to spend massively on originals and has the cash available to do so. The company generated a massive $9.5 billion in operating cash flow in its most recent quarter.
As a matter of fact, the PC market has been in decline over the past few years. The primary reason for the decline is the continuously growing usage of smartphones. Google launched its first in-house flagship Pixel phones in October 2016 and had received an overall rating of 8.8 on Cnet.com. Google Pixel is a high-end smartphone intended to compete directly against Samsung’s (SSNLF, Financial) and Apple’s (AAPL, Financial) flagship phones.
HTC (TPE:2498, Financial) manufactures Google's Pixel headsets; according to the Taiwanese company, the search giant has shipped more than 2 million units to date. After enjoying the success of Pixel 1, the company is on its way releasing the next model of Pixel named “Pixel 2,” possibly in November.
Apart from this, Alphabet is also aggressively focusing on the autonomous cars market. The company’s Waymo division recently announced that it is introducing an early rider program in Phoenix to gain feedback regarding its technology and cars. The early riders will be offered around 500 Fiat Pacifica Hybrid minivans powered by its technology, signifying that Alphabet is pursuing the ride-sharing market.
Moreover, the company also partnered with Lyft, which now plans to integrate Waymo’s technology into its autonomous vehicles. In all, the ride-sharing market is expected to grow at a healthy rate in the future, and Alphabet looks well positioned to gain huge benefits going forward.
Summing up
Although the company currently generates the majority of its revenue from its advertising business, it is also aggressively focusing on its “Other Bets” division. The company’s aggressive focus on other segments such as self-driving cars and smartphones will make it a diversified company.
Moreover, the company is spending hugely on producing original content that will reap results in the future. It will continue to face fierce competition from big and well-established players.
On the other hand, the stock currently trades at a price-earnings (P/E) ratio of 31.02, slightly greater than the industry’s average. Despite being somewhat overvalued, its long-term outlook looks good. As a result, shareholders should continue holding the stock for more returns in the future.
Disclosure: No position in the stocks mentioned in this article.
