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Alphabet: ignore the stock split, look at how revenue is divided

Some of the most interesting aspects of digital advertising giant Google live outside its vast ads market. Parent company Alphabet is putting more money into cloud services. High net income growth and positive forecasts suggest they are about to receive an extra boost.

Advertising remains by far the biggest business, accounting for 81 per cent of group revenues. These beat estimates in the final quarter of 2021, rising 32 per cent to $75bn. But the business is not valued as highly as its trillion dollar-plus peers. Alphabet’s enterprise value is equal to 14 times forecast ebitda — lower than Apple and Microsoft.

There may be some uncertainty about how successful Alphabet will be in diversifying its revenue streams. Google Cloud Platform’s revenues of $5.5bn were up 45 per cent on the previous year. But it still accounts for just 7 per cent of the total. Amazon and Microsoft dominate the market. Google is still at investment phase. The unit remains lossmaking.

Revenue growth is higher than Amazon’s AWS and Microsoft’s cloud services — though all three companies define their service sales differently. It is difficult to tell whether Google is successfully grabbing more share in the key part of the market, for cloud computing platforms.

Other high profile but earlier-stage investments are still at the planning stage and collectively lost $1.45bn in the last quarter. Driverless car unit Waymo is testing its vehicles but General Motors’ Cruise beat the company to the punch by announcing a wait-list for fully driverless rides in San Francisco.

Alphabet’s decision to increase the number of shares in circulation is eye-catching too. The 20 for one stock split leaves the equity value of the company unchanged. Perhaps lower prices for individual shares will make smaller — ie retail — investors see them as more affordable. In theory liquidity could increase, although fractional stock trades are already possible. But possible inclusion in the price-weighted S&P Dow Jones Industrial Average index might increase passive fund inflows. It could not accommodate Alphabet shares at their previous level without skewing the index.

When Apple and Tesla announced stock splits in 2020 share prices jumped. Shares in Alphabet rose 9 per cent in after-hours trading, a touch below the all-time high. There is reason to expect this rally to last.

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