Alphabet Q4 21 – Plain sailing.

Alphabet on track for a good 2022

• Alphabet reported very solid results as seasonality augmented the secular shift to digital advertising and the potential headwinds caused by Apple privacy issues and economic disruptions caused by the latest pandemic variant had little if no impact.
• Q4 21 revenues / EPS were $75.3bn (up 32% YoY) / $30.69 comfortably ahead of forecasts of $71.8bn / $27.3 driven mostly by the core advertising search business.
• Other areas such as Google Cloud grew more quickly but even at 45% YoY, this segment is not making up any ground on either AWS or Microsoft Azure.
• As a result, Alphabet will be investing even harder in the cloud this year in order to establish it in the market as a viable alternative to both AWS and Azure.
• Part of the problem here is that Google is a consumer-oriented company where it aims to make its services fun and useful to use in order to draw engagement for advertisers to leverage.
• Cloud is a B2B operation that requires a different mindset, and it is taking Alphabet a long time to adjust to this different way of doing business.
• Generally, I continue to think that Alphabet is too late to the enterprise game and that Office 365, Azure and AWS will continue to dominate with Alphabet not making much headway.
• Consequently, this will slightly reduce the long-term returns that Alphabet makes on its investment but not in any way that meaningfully impacts the company or the shares overall.
• Alphabet is also a little bit behind on the Metaverse, but I understand that there is a lot of activity behind the scenes as the levels of investments being made by others is ramping up substantially.
• Google has made some important hires in this area and critically, it does have time as the Metaverse is going to take a very long time (5 years or more) to reach fruition.
• Hence, while it appears behind at first glance, it has yet to set out its stall for the Metaverse and I suspect that we might start to hear its plans at its developer conference (Google I/O) this year.
• Generally, the outlook for 2022 remains pretty good although growth is almost certain to slow down somewhat.
• Increasing interest rates will hamper economic expansion but the secular trend towards digital advertising will continue to support Google especially in the absence of any real competition outside of China and Russia.
• Alphabet shares are not at the very high end of the technology valuation spectrum meaning that it will be more defensive than the likes of Netflix, Amazon, Nvidia and so on but there are better value bargains to be had.
• Here, the likes of Alibaba, Nokia, Intel and Qualcomm offer much better long-term value, but all of these (with the exception of Qualcomm) require conviction in their ability to recover.
• Of these, the Alibaba and Nokia recovery look the most promising which is why I continue to own both.
• I would own Alphabet over the highly valued end of the technology sector but for those that are prepared to do more work on analysis, there are better options.
• Hence, I remain pretty ambivalent to Alphabet.