Alphabet | Fundamental Analysis | SHORT

Alphabet, Google's parent company, has returned about 800% to its investors over the past 10 years, more than double the return of the NASDAQ, which was nearly 400%.

Alphabet also remained resilient during the COVID lockdown, as an increase in its cloud business compensated for a transient deceleration in ad sales. The company also avoided a post-localization slowdown as its advertising and cloud businesses increased in tandem. As a result, Alphabet's stock is up 65% in 2021, well ahead of the NASDAQ, S&P 500, and even the growth-oriented ARK Innovation ETF Cathie Wood.

Can Alphabet continue to achieve such heights, outperforming the market? To find out, let's evaluate the long-term potential of its core as well as nascent related businesses.

In the first nine months of last year, Alphabet made 81% of its revenue from Google ads (including YouTube). Google's sprawling ecosystem, which creates targeted ads based on a user's personal data and browsing habits, allows it to share a near duopoly in the digital advertising market with Meta's Facebook and Instagram.

But Google's market share could gradually shrink over the next few years as Amazon and other smaller ad platforms shrink the market. For instance, eMarketer predicts Google's share of the U.S. digital advertising market to decline from 28.6 percent in 2021 to 26.4 percent next year.

Nevertheless, the global digital advertising market could still grow at a compound annual growth rate (CAGR) of 15.3% from 2020 to 2025. The research firm also expects the market to continue growing at a CAGR of 13.7% from 2025 to 2030.

Thus, the growth of the broader digital advertising market, led by high-growth emerging markets, could easily offset any loss of market share to Google by other advertising platforms. Google's advertising business could easily match the rate of market growth if it takes care of its near-term headwinds, including antitrust investigations, Apple's privacy changes in iOS, and a plan to block all third-party cookies in Chrome by the end of 2023.

These adaptations could push Google to decrease its dependence on targeted ads and rely more on first-party data and contextual advertising. This transition may be bumpy, but Google is likely to remain the leading advertising platform for businesses as long as it dominates the online search and video markets.

The other major growth driver for Alphabet is Google Cloud, which brought in 7% of the company's revenue in the first nine months of 2021.

As per Canalys, Google Cloud controlled only 8% of the global cloud infrastructure market in Q3 of last year, putting it a distant third behind Amazon Web Services (AWS) (32%) and Microsoft Azure (21%).

Google Cloud is still growing rapidly. Its revenue grew 46% to $13.1 billion in 2020 and another 48% year over year to $13.7 billion in the first nine months of 2021. Its share of 8% in the third quarter also improved from 7% a year ago and 6% in the third quarter of 2019.

According to Report Ocean, the global cloud computing market will grow at a compound annual growth rate of 17.3% from 2021 to 2027. Google Cloud is likely to equal or even surpass that growth rate if it just doesn't fall behind Amazon and Microsoft in the cloud infrastructure race.

Investors are not currently paying much attention to Alphabet's other divisions, which include hardware products (Pixel, Home, Nest, and Fitbit), subscription services, life sciences divisions, and the Waymo drone division.

But over the next decade, these small businesses could start generating a much larger percentage of Alphabet's revenue. Its hardware devices could benefit from the continued expansion of the smart home and Internet of Things (IoT) markets, its Calico and Verily science divisions could launch innovative medical procedures and devices. Waymo could launch more robo taxis or license its unmanned driving technology to major automakers.

The estimates for these next-generation markets are staggering. According to experts, the global IoT market will grow by 25.4 percent from 2021 to 2028. The same company expects the driverless car market to grow 31.3% from 2021 to 2028.

If Alphabet's CAGR grows by 15% over the next ten years, annual growth will amount to an increase from $254 billion in 2021 to more than $1 trillion in 2031. This growth could be interrupted by antitrust threats, a platform change, or an economic downturn, but Alphabet still has a path to many times more profits over the next decade-even for those investors who missed its last 10-year growth.