Alphabet (GOOGL) stock has surged more than 250% since we added it to our Focus List in August 2016, nearly doubling the S&P 1500 Index’s total return, recalls Rich Moroney, editor of Dow Theory Forecasts.
We see a long runway for more gains ahead, given Alphabet’s strong position in digital advertising; we recommend the stock as a favorite investment for the coming year.
During the pandemic, Alphabet, Meta Platforms (FB) and Amazon (AMZN) expanded their dominance in the advertising industry and now combine for more than half of all ad spending outside of China, versus 40% in 2019, estimates industry researcher GroupM.
Online ads account for about 64% of total advertising, says GroupM, up from 52% in 2019. Digital ads are projected to grow 31% in 2021. Total ad spending is forecasted to rise 10% next year, with spending on social-media ads expected to outpace TV commercials for the first time.
Alphabet is planning to launch a new smartwatch next year, possibly in the spring, intended to compete with the Apple Watch, according to online reports. The device will likely draw on technology inherited with Alphabet’s acquisition of Fitbit, a wearable-health-device company purchased in January 2021.
Alphabet has a long history of adapting to change without losing its edge. Just about all of its legal and regulatory challenges revolve around the fact that it has created digital platforms that have grown ubiquitous enough to afford the company massive negotiating leverage. That leverage has paid off in the form of incredible growth.
Google is gaining share in the cloud and investing billions in such initiatives as machine learning, quantum computing, self-driving vehicles, and drones — businesses with the potential to open up huge new markets.
Alphabet’s Waymo business partnered with Zeekr, a premium electric-mobility brand based in China. Zeekr will make electric vehicles at a facility in Sweden that could help Alphabet expand its driverless-taxi service. Waymo launched its autonomous ride-hailing service in Phoenix last year — the only such service available in the U.S.
Analysts are increasingly bullish on Alphabet’s 2022 prospects, with the consensus projecting 5% profit growth on 17% higher sales. The stock will never be confused for being cheap. But its P/E ratio for estimated 2022 profits drops to 24 from 26 after backing out net cash of $167 per share. Alphabet is a Focus List Buy and a Long-Term Buy.
A Look Back to 2021's Top Performers
Last year, Rich Moroney picked two favorite ideas, and both were exceptionally strong performers. Here he updates those stocks:
Applied Materials (AMAT) rose 82% last year. The supplier to the semiconductor industry remains a top pick for 12-month and long-term gains. The consensus calls for profit growth of 19% in fiscal 2022 ending October and 7% in fiscal 2023, reflecting a slowdown from post-pandemic growth rates but continued strong demand as chipmakers attempt to satisfy product shortfalls by expanding capacity.
MYR Group (MYRG) rose 88% last year. The company, which provide electrical construction services, remains on our Best Buy List. While it no longer ranks as my favorite name in my small cap advisory service Upside, I still think it has another 15% to 20% of upside potential.