Alphabet share price forecast for 2020 and beyond

Has the Alphabet share price forecast – stock in Google’s parent company – been affected by continuous controversies and eye-watering fines?

As 2019 draws to a close, it’s time to look at the Alphabet share price forecast for 2020 and beyond. For the uninitiated, Alphabet has become a big beast since it was formed five years ago. It’s Google’s parent company – a massive umbrella including hundreds of subsidiaries.

An unusual corporate structure means two types of Alphabet shares are traded publicly. Class A shares are the most common and give investors regular voting rights, while Class C shares do not. Financial results are normally broken down into three categories – you have Advertising (incorporating revenues from Google search and YouTube), Other Revenues (bringing in income streams from the Android app store and Google Cloud) and Other Bets (investments in start-ups which are more likely to lose money).

Google stock predictions have been affected by several recent developments in Alphabet – some good, some bad. Co-founders Larry Page and Sergey Brin made a sudden departure from the business in December, with Sundar Pichai becoming Alphabet’s CEO. Tension has been brewing between management and employees over a handful of controversial projects, including plans to provide AI technology to the Pentagon and develop a censorship-compliant search engine in China. There have also been fines running into billions of dollars from the likes of the EU and France, and antitrust investigations are gaining momentum in the US.

Google stock projections: What Alphabet is worth

At the time of writing, Class A shares in Alphabet (which have the GOOGL ticker symbol on the Nasdaq) had a market cap of $933.3bn.

Alphabet’s impressive value is matched by an astoundingly large cash pile. Whereas Apple used to hold the title for the company with the biggest financial reserves, Google’s parent company took over in July when it revealed it had $117bn in the coffers – a lot more than the $102bn that Apple has set aside for a rainy day.

The most recent financial results for Alphabet are from the third quarter of 2019. Although they held few surprises for investors, earnings per share of $10.12 were considerably short of the $12.42 analysts had been expecting. Q3 revenue stood at a whopping $40.5bn.

Alphabet’s business model

Unsurprisingly, most of Alphabet’s revenue continues to be driven by one product in particular. Of that $40.5bn earned in the third quarter, $33.9bn was from advertising – a figure that’s grown by more than $10bn in the past two-and-a-half years. Estimates from eMarketer suggest that Google will have a 73.1 per cent share of the US search ad market by the end of 2019, but this could fall to 70.3 per cent by 2021.

Despite this forecast decline, Google continues to dominate the world of online search, generating income from the ads and sponsored links which accompany every query. The infrastructure that businesses use to reach consumers is also becoming more sophisticated, and about 50 per cent of Google’s advertising space is now sold using automated bidding. All of this helps to streamline the tech giant’s costs and deliver a more efficient service.

It is difficult to accuse Alphabet of complacency, given the fact that the behemoth has its fingers in so many pies. As well as owning the popular video-sharing site YouTube, it runs the Chrome browser and Android operating system, offers cloud computing services, manufactures smartphones and laptops and makes internet-connected devices such as smart thermostats and security members under the “Nest” brand. We haven’t even mentioned the other products in Google’s stable that millions of us use on a daily basis, including Gmail, Google Maps and Google Docs.

As Pichai said on a call with investors after disclosing Alphabet’s Q3 results: “We’ve evolved from a company that helps people find answers to a company that helps you get things done.”

Alphabet share price history

The tech giant’s stock price has come a long way from the heady days of August 2004, when Google held its initial public offering for $85 a share. A total of 22.5 million shares were sold, with a modest $1.9bn raised. In terms of performance on their first day of trading, shares ended the session at about $100 – an increase of almost 20 per cent.

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A two-for-one stock split took place in 2014, creating the corporate structure that remains in place today. This meant investors received one non-voting Class C share for every Class A share they owned. The price of a single Class A share stood at about $1,355 at the time of writing – a far cry from the $1,025 recorded at the start of 2019.

That said, Alphabet’s Class A shares have experienced their fair share of turbulence over the past 12 months. At the end of April 2019, the stock tumbled by 8 per cent in a single day – wiping $70bn off the company’s market value – on the back of disappointing Q1 earnings. There was another fall of about 6 per cent at the start of June – taking the shares to lows of about $1,040 – when reports first emerged that the US Department of Justice was considering an investigation into whether Google gave preferential treatment to Alphabet businesses in its search engine algorithms. Despite the odd blip along the way, shares have recovered in the seven months since – increasing by about 30 per cent.

Google share price forecast for 2020

So: what lies ahead for the Alphabet share price forecast in 2020, incorporating Google? Well, according to CNN Business, 42 analysts have a median price target of $1,460 – an increase of 8 per cent at the time of writing. One has a high estimate of $1,908 for Class A stock, which would be an increase of 41.2 per cent, while the low estimate predicts a 7.5 per cent decline from current levels to $1,250. Of 45 analysts polled by the network, 36 had a buy rating.

Some, like RBC Capital Markets, have an “outperform” rating on Alphabet stock for 2020 – meaning they believe share price growth will be greater than the market average. Others, such as Mott Capital’s Michael Kramer, believe the shares are currently “historically cheap and could see significant multiple expansion in the months ahead”. Baird analyst Colin Sebastian is also predicting big things for Alphabet stock in the not-too-distant future. He argues that the stock market overlooks Google’s performance in e-commerce through its shopping division, which has volumes not too dissimilar from other third-party marketplaces such as Amazon and eBay.

There are analysts who use their Google stock predictions to warn that ambitious 2020 targets will only be met if expenses are kept in check and greater levels of transparency are offered in the breakdowns of financial results. Even though Brin and Page may no longer be a part of Alphabet’s leadership team, their rare Class B shares give them supervoting rights that could stymy the company’s evolution.

Growth factors and potential disruptors

The ongoing scrutiny of Alphabet’s business practices – and scrutiny by US lawmakers into whether tech giants have grown too big – could deliver sizeable headaches for Alphabet going forward.

It’s also telling that Google recently fell out of Glassdoor’s top 10 list of the best places to work, where it has had a presence for the past eight years. Back in February 2019, Bloomberg reported on an internal poll of Google employees that revealed 74 per cent have confidence in the company’s senior management – a fall of 18 percentage points compared with a year earlier.

Alphabet’s appetite for “Other Bets” – investments that may not turn a profit immediately – could also come into sharp focus. Although ventures such as Waymo, Google’s self-driving car project, have the potential to drive revenue in future, some analysts are concerned about how they burn cash. Just look at the first three quarters of 2019 – Other Bets lost $868m in Q1, $989m in Q2 and $941m in Q3. Pressure to rein in expenditure is likely to grow in 2020.

Even if Other Bets are left untouched, there remains plenty of room for growth at Alphabet. By and large, traders and investors seem to be unfazed by the large fines the company attracts on a regular basis. Long-term bets such as Google Cloud are beginning to pay off and the online ad market is far from saturated, with growth of up to 66 per cent forecast in the next three years as offline spending dwindles. Google stock predictions and investor confidence would also be boosted if Alphabet embarked on a more aggressive buyback programme given its massive cash pile – and rewarded shareholders with dividends.

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