October 19, 2021

Acqua NYC

Fit And Go Forward

Alphabet’s Smash Earnings Report Proves GOOG Stock Can Hit $2,500

Technology giant Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) reported blockbuster fourth-quarter earnings on Tuesday, smashing the Street’s revenue and earnings expectations. Wall Street cheered the results and, as of this writing, GOOG stock is up about 8% to fresh record highs above $2,000.

Source: turtix / Shutterstock.com

To answer your most obvious question, yes, the numbers were that good. Broadly, Alphabet is growing faster than it has since 2018, while its profit margins are faring better than they have since 2017.

Thus, Alphabet’s growth narrative is picking up steam.

It will continue to pick up steam as we head deeper into 2021, thanks to rebounding ad spend, sustained robust consumer digital engagement, enterprise virtualization tailwinds, and moderating expense trends.

As this growth narrative sustains healthy momentum, GOOG stock will sustain its uptrend. Shares will likely end 2021 close to $2,500.

Here’s a deeper look.

GOOG Stock: Blowout Earnings

Alphabet’s fourth-quarter numbers were very, very good.

On a constant-currency (CC) basis, revenues rose 23% in the quarter. That’s up from 15% growth last quarter, and represents the company’s best CC revenue growth rate since the fourth quarter of 2018.

This multi-quarter-best revenue growth rate was powered by everything firing on all cylinders at the business. Ad revenues rose 22% year-over-year, the best clip since the second quarter of 2018. Google Search ad revenues rose a very healthy 17%. YouTube ad revenues continued to surge, rising 46% in the quarter.

Meanwhile, Google Cloud sustained its growth trajectory, posting 47% revenue growth in the quarter.

Perhaps more impressively, Alphabet’s operating margins clocked in at 28%, up 800 basis points year-over-year. We haven’t seen Alphabet post operating margins north of 25% — let alone close to 30% — since 2017.

Overall, the quarter illustrated that Alphabet is on fire today. Best revenue growth rates since 2018. Best margins since 2017. No wonder GOOG stock is flying to record highs.

Building Momentum in 2021

The more important piece of the GOOG stock bull thesis, however, is that this momentum has legs.

There will be a big ad spending recovery in 2021-2022 as the physical economy reopens and consumers spend more. But, consumers will remain heavily engaged in the digital channel. Accordingly, most of the ad dollars that go back to work in 2021-2022, will find their way onto digital platforms.

Alphabet is well-positioned to win a big portion of those digital ad ad dollars, since Google Search is deeply entrenched as the digital search leader while YouTube is clearly proving itself as a high-quality digital video advertiser.

At the same time, cloud spending will rebound in a big way in 2021-2022, too, amid sustained enterprise virtualization trends. Google Cloud is one of three major players in the cloud computing space. This rising tide will lift all three boats.

Of equal importance, Alphabet’s traffic acquisition cost (or TAC) growth is moderating, providing a boost in ad business margins, while Alphabet’s shift to a quasi-permanent work-from-home model should save on recurring physical office expenses going forward. Thus, operating margins should remain on a steady uptrend.

Big picture: Alphabet didn’t just have a great Q4. The company is positioned to have a great 2021, too. If so, then GOOG stock could fly to $2,500.

Pathway to $2,500

Based on the company’s strong fourth-quarter numbers and healthy outlook, I’ve raised my long-term estimates in my Alphabet model.

Specifically, I now see Alphabet’s ad business sustaining 10%-plus revenue growth over the next decade, with its cloud business growing at a ~20% pace. I’ve also revised my long-term operating margin target higher, from 25% to the the upper 20s.

Under those assumptions, I see Alphabet hitting over $500 billion in revenues by 2030, with earnings per share of ~$200. Based on a 20X forward earnings multiple and an 8% annual discount rate, that implies a 2021 price target for GOOG stock of about $2,160.

Importantly, this model does include any upside from Waymo. But, as we all know, Waymo is the world’s leading self-driving company — and one day, it could add over $100 billion in revenue to Alphabet’s topline.

Factoring in potential Waymo upside, I think GOOG stock is worth about $2,500 today.

Bottom Line on GOOG Stock

Alphabet’s business is on fire today. More importantly, it will remain on fire for the rest of the year, too. So long as this company continues to fire on all cylinders — and the news flow on the Waymo front remains favorable — GOOG stock will gradually push toward $2,500 in 2021.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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