Alphabet (Google): A Top Stock For A High-Inflation Environment (NASDAQ:GOOGL)

Unprecedented emphasis has been placed upon reducing inflation. Inflation that exceeds wage growth and returns on invested capital can have negative repercussions. If earned income and the return on capital from investments don’t keep up, it can have devastating repercussions.Inflation can cause a significant decrease in purchasing power due both to rising prices, higher living costs, and depleting savings accounts and retirement portfolios. It could also lead to increased debt levels, as well as depleting retirement portfolios or depleting savings accounts. If an individual does not have a portfolio that can offset the effects of inflation, it can be very dangerous.

Today InflationThe rate of growth has increased to 8.5%, the highest recorded level since December 1981. The price of energy rose 32% while food prices rose 8.8%. As there is no cheap capital, it is imperative that investors do a thorough financial analysis of their investments. As they fail to pass increasing costs onto the consumer, most companies will see rising operating costs, declining sales volumes and shrinking margins. Inflation causes many cost-conscious shoppers to shop with heightened awareness in order to squeeze every dollar from their dollars. This could mean switching to store brands, or cutting out unnecessary expenses from their monthly budgets.

Conventional wisdom suggests that investors should invest in resilient consumer defensive businesses that can leverage economies of scale as well as high pricing power. Companies that fit into these parameters are more likely to pass rising costs onto consumers and not incur declining sales volumes. Traditional investment strategies are to invest in dividend-paying companies because their financials can be predicted and are predictable. They also add gold as a hedge against inflation.

A dollar today won’t buy the same amount of goods in 2032. The same way that the dollar’s buying power has changed since 2012, the dollar’s value will not be the same in 2032. Inflation has always occurred in market economies throughout history. The only way to avoid it is to increase your income faster than inflation rises, or to invest in asset classes that can outperform during high inflation. As the world has become more globalized, so should global market reach be considered when searching for investable assets that can outpace inflation. For every $10,000 of capital invested, you must have a year that exceeds $10,850 in order to beat the current rate of inflation (8.5%). This can be capital appreciation, dividends or a combination of both.

Inflation has increased 102.38% in the past year, from 4.2% to 8.5%. There are too many variables, unknown factors and variables to accurately predict the rate at which inflation will rise and fall. The 2021 fiscal year is a great reference point, as December’s inflation was 7%. I want companies with these characteristics:

• The combination of total operating expenses and cost of revenue drove revenue growth.
• A 3-year track record of increasing net earnings
• Gross profit margins that exceed 50%
• Margin exceeding 25%
• Sideways capital expenditure expense and increasing cash from operations leads to increased Free Cash Flow
• More cash in hand than total liabilities

These qualifications remove almost all individual equity from the market because only a few companies meet these criteria. I believe Alphabet (NASDAQ:GOOGL) is the best-positioned stock to outpace inflation.

It’s time to rethink “Conventional thinking” and “Conventional wisdom”.

Yes, during inflation or even a recession, people will need to purchase food, pay their electricity bills, and use real estate space. Technology must be considered in addition to the traditional wisdom about inflation-proof and recession-proof stocks. No one is giving up their cell phones. Companies will still advertise, people will still consume content, search engines will continue to be used by everyone. It’s not 1980, and the 1980 mentality about which sectors will prosper during inflation must be updated.

Alphabet is an amalgamation of businesses. Google is the most popular, with two segments: Google Services (and Google Cloud). Alphabet has many businesses that include Google, Chrome, Chrome, Gmail and Google Drive. Alphabet has created world-class advertising technology for publishers, agencies, and advertisers to power their digital marketing businesses. Alphabet’s advertising solutions have helped millions of companies reach their target audience and grow their businesses.

These statistics show Alphabet’s dominance.

Google ChromeSafari is 2nd with 18.84%, and 64.53% of the browser market share worldwide.

GoogleBing is 2nd with 3.1%, and Google has 91.56% of global search engine market share.

AndroidAlphabet holds 71.7% of global mobile operating system market share (smartphones), whereas iOS from Apple (AAPL), accounts for 27.57%.

When All platformsTaken into account, computers, tablets and smartphones, Android holds 41.56% of global operating system market share. Windows from Microsoft (MSFT), comes in 2nd with 31.5%, and iOS is 3rd with 16.85%.

Honorable mention Google CloudThey account for 9% of global cloud infrastructure spending, which puts them in third place behind Azure from MSFT (22%), and AWS From Amazon (33%). This is significant as YOY Google Cloud’s revenue has increased by 47.07%. Over the next 8 years, global cloud infrastructure spending is expected to rise to $1.55 trillion. Google Cloud would have a revenue of $100.75 billion if it could maintain a 6.5% market share by 2030.

Technology is embedded in society. Alphabet operates the 3rd biggest cloud infrastructure platform, the most used browser, search engine and mobile operating system. It doesn’t matter whether we experience higher inflation or a recession; these products from Alphabet are used daily by billions.

Alphabet’s Financials have dominated throughout 2021 as inflation rose to 7%

Alphabet has hands down the best financial records of any publicly traded company.

Statement of Income

Alphabet’s revenue has increased by $75.11 billion (41.15% YoY) from $182.53 billion and $257.64 billion. Search saw a 43.14% increase ($44.89B), YouTube ads revenue rose 45.89% ($9.07B), while Google Cloud grew by 47.07% (6.15B).

Growth without profit is not enough to increase a company’s revenue. I want to make sure that a company isn’t spending its way towards a better price-to-sales ratio. The revenue growth must be greater than the growth in both the cost of revenue or total operating expenses. Alphabet’s cost to revenue increased by $26.21 million in 2021 while its total operating expenses rose by $11.41 million. Alphabet’s revenue growth was greater than its overall expense growth of $37.49 Billion, or 99.65%.

Gross profit margin is an indicator of how much revenue a company has that goes directly to producing it, and how strong their moat around it. You can read the full article Warren Buffett and Financial Statement InterpretationIt is located on page 34 in the Kindle edition.

As a general rule (and there are exceptions), companies with gross profits margins of at least 40% tend to be those with a durable competitive advantage. Companies with gross profits margins below 40% are usually in highly competitive industries where overall profit margins are being affected by competition (there are exceptions).

Alphabet’s Gross Profit grew by 50% ($48.90B / $146.7 billion) in 2021. This puts Alphabet’s Gross profit margin at 56.94% ($146.698/ $257.637). This is significantly higher than the Oracle of Omaha’s magic number of 40.

In times of inflation, it’s more important than ever to generate profits because the next economic cycle often involves a recession. A solid war chest and the ability generate profits can make the difference between relevance and chapter 11. Alphabet generated $76.03 billion in net revenue in 2021, and it ran its own cash machine. This was an 88.81% YoY rise ($35.76B), during a period of inflation. Alphabet’s 2021 net income is not a fluke, as it increased YoY sequentially in the three previous years. Alphabet’s profit margin stands at 29.51%. Alphabet’s revenue increased by $75.11 billion in 2021, almost 1/3 of which goes directly to the bottom line.

Statement on Cash Flow

Free cash flow (FCF) is the most important financial metric. This is how companies pay dividends, repay debt, buy back shares, or reinvest their earnings. Inflation is a time when you want to invest in companies that not just generate positive FCF but also grow their FCF. I look for companies that can grow their cash from operations, while keeping capital expenditures relatively low.

Alphabet is an exception in this regard because its annual capital expenses decreased by -499 millions over the previous three years while its cash from operations increased by $43.68 Billion (91.06%), to $91.65 Billion. Alphabet’s FCF was $67.01 Billion in 2021. This type of FCF can be used to make any acquisitions or increase earnings by repurchasing shares and directly increasing EPS.

Balance Sheet

Alphabet has one the strongest balance sheets on the market. A company’s balance sheet is crucial. A balance sheet is vital in a rising rate environment, where inflation is increasing and it is impossible to pass additional costs onto the consumer.

Alphabet has $107.63 trillion in total liabilities, $64.25 Billion of which is long-term credit. Alphabet currently has $139.65 Billion in cash and equivalents. Marketable securities are more easily liquidated if they are part of current assets than non-current. All of Alphabet’s liabilities can be eliminated without having to tap the debt markets with a single check. Alphabet could eliminate all its long-term debt while still having $75.4 billion in cash. This does not include the tens to billions of dollars in quarterly net income Alphabet earns. Alphabet might have the strongest balance sheet in all of the market. If it doesn’t, it’s definitely in conversation. Alphabet will not be affected if there is inflation or a recession.

Why Alphabet is Bound to Outpace Inflation by 2022

Alphabet is trading at its 52-week high price of $3,030.93 (-$496.33), and its most recent high on 4/4/22, $2,859.43 (-11.36%). Alphabet’s current value of $2,534.60 shows an appreciation rate of 10.91% in the past year. However, inflation has barely doubled to 8.5%. Alphabet’s share prices could rise to $3,000 if strong earnings are achieved in just a few trading sessions.

Alphabet also has a significant catalyst on the horizon: their 20-1 stock split. Although a stock split doesn’t create value for the company at first, it does create opportunity. Alphabet’s $2,534.60 share value means that investors aren’t clamoring to buy shares. Alphabet traded 1.58 million shares, while AAPL had 75.33 million shares.

Normally, a stock split is declared by a board. This is taken to be a vote of confidence that the company’s share values will continue rising, which can be a bullish indicator. A 20-1 split would bring Alphabet’s share prices to around $126.73, making them more attractive for retail investors as well as new investors. Alphabet will see an increase in volume at $126.73, which will mean that more shares are traded, increasing its liquidity on the market. Stock splits could also signal a positive signal to rating agents, which could have an impact on the share prices. As alternatives become more accessible to non-institutional investors, we will also see derivative markets opening up. A May 20thA call option that is just out of money with a strike at $2,550 had a final sale of $99.01. A naked call would cost $9901 and a covered call would require 100 shares of Alphabet. You would also need the equivalent of $253,460 cash to secure the transaction. An AAPLThe May 20th call, which was just outside the money at $170, had a last sale price of $4.10. The naked call could be purchased for $410. Having the ability to sell a covered calls would give you 100 shares of AAPL and $16,529 as collateral. As options volumes continue to rise, the 20-1 split is expected to have long-lasting positive impacts on derivative markets.

As Alphabet shares are made more accessible to all investors, I believe we will see a huge demand for Alphabet shares. Due to the demand for these newly priced shares, trading volumes will increase.

It all comes down to earnings. Alphabet is forecast to surpass earnings through 2022. Alphabet has a lot of this category. Expanding earnings is a key component of share appreciation. In an inflationary environment it can be difficult for companies to increase earnings potential. In 2021, the consensus was that Alphabet would earn $85.28 per share. Alphabet beat the consensus quarterly estimate and earned an additional $26.95 (31.60%), as they produced $112.23 EPS. In 2022, the consensus estimates have increased $30.28 (35.51%), from 2021. The street expects Alphabet’s EPS to be $115.56 by 2022. Alphabet’s growth has not stopped. The street expects Alphabet to do big things in 2022. Alphabet’s combination of big earnings beats, stock splits, YoY revenue growth and profit growth should make it easy to surpass inflation in 2022.

The risks of investing in Alphabet

There are always risks involved in any investment. Alphabet is a company I believe in, but there are still risks. In 2018The EU had already fined Alphabet $5 Billion for manipulating Android mobile devices to give Google search engine an advantage over its competitors. In 2021The EU’s General Court affirmed a European Commission decision against Alphabet for antitrust violations. They are now facing a $2.8 billion fine. Alphabet has also experienced problems in the States, as the U.S. Justice Department and 11 StatesIn 2020, Alphabet had filed a lawsuit alleging that it used market power to protect its rivals.

Alphabet’s dominance becomes synonymous with monopoly when you consider Google Chrome having 64.53% of global browser market share and Google having 91.56% of search engine market worldwide. Android, which has 71.7% global mobile operating system market share, makes matters worse. Alphabet could pay billions in fines without feeling the repercussions. But it’s putting them right into Washington DC’s crosshairs. Alphabet has testified on Capitol Hill more than they would like. Some lawmakers have noticed a common theme: Alphabet is a monopoly. If the United States Government declares Alphabet a Monopoly, the company could be forced to disintegrate. If political opposition continues its growth, Alphabet may find itself on top more often. DC could increase pressures with an unfavorable ruling for Alphabet.

Conclusion

The old school mentality that which sectors should be your defensive plays in times of volatility, inflation, or recessions must be rewritten. The world of 2022 is very different from the late 70s and early 1980s, when inflation was at such high levels. Companies that can grow revenue, gross profits, net income, FCF and EPS in tough economic times are the best. They also have strong balance sheets. Alphabet ticks all the boxes. Utilities have been a safe haven and I am a shareholder in Southern Company (SO). However, Alphabet generated more net income ($76.01B), than SO generated in revenue ($22.41B) during 2021. Proctor & Gamble (PG), the king of consumer staples is also affected. PG’s 2021 revenue of $76.12 million was the equivalent to Alphabet’s profit. Strong offense is the best defense because it doesn’t rely on defense. Alphabet is cash-rich with $139,65 billion, generates $76 trillion in net income and grows its revenue by double-digits YoY. Its earnings are expected to grow in 2022 and 2023. Alphabet makes every other company look uninvestable. Alphabet 2022 will be a great year. The stock split will drive volume and earnings will be exceptional. These are the reasons why I am a shareholder. I plan on buying more shares and will use Alphabet to beat inflation.