Alphabet was the top Big Tech stock of the year — here’s why

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Sundar Pichai, CEO of Alphabet, in Brussels, Belgium, on Jan. 20, 2020.
Geert Vanden Wijngaert | Bloomberg | Getty Images

Alphabet is on the verge of wrapping up its best year from an investment perspective since 2009, and has proven to be by far the top-performing Big Tech stock of 2021.

As of Thursday’s close at $2938.33, Alphabet’s stock is up 68% this year. With just five trading days left in 2021, it’s virtually impossible for any of its biggest peers to catch up.

Microsoft is the closest, up 51%. Apple has gained 33%, followed by Facebook (now Meta) at 23% and Amazon at 5%. You can even throw in Tesla, which has climbed 51% for the year. The Nasdaq 100, a basket of the largest nonfinancial companies in the Nasdaq, is right in the middle, up 27%.

Alphabet, which gets the vast majority of its revenue from Google’s advertising business, has proven resilient during the Covid pandemic and resistant to the latest bout of inflationary concerns. Consumers have flocked in greater numbers to web and mobile search, maps and YouTube videos, and Google’s growing cloud infrastructure unit picked up business from the explosion in remote work.

Big Tech in 2021
CNBC

In its third-quarter earnings report in October, Alphabet reported a 43% increase in advertising revenue to $53.1 billion, and a similar jump in YouTube ad sales to $7.2 billion. Earnings topped analyst estimates.

While other ad-based internet companies like Facebook and Snap were dragged down by privacy changes to Apple’s iOS, Google has held up better, thanks in part to its control over the Android operating system and lack of reliance on Apple.

For the full year, revenue is expected to climb 39% to $254 billion, according to the average analyst estimate in a Refinitiv survey. That would mark the fastest growth since 2007 and follows a year of just 13% expansion, as the Google parent reckoned with a brief drop in revenue, for the first time, in the second quarter of 2020.

In early 2021, Google’s search business began growing at pre-pandemic levels, driven by a rebound in advertising. Countries began reopening and consumers searched more for products and travel options while spending additional time on YouTube, which saw the most significant growth of any social media app among American users during the pandemic, according to the Pew Research Center.

“Alphabet’s recovery from the 2Q20 COVID-19-induced advertising slump has been remarkable,” wrote analysts from Argus, in a late October report. The firm has a buy rating and wrote, “We see continued momentum in the coming quarters as e-commerce and digital advertising have burgeoned with economic recovery.”

The last time Google delivered better returns for Wall Street was 12 years ago, when the stock more than doubled for the year. Google was a much smaller company then, and its market cap didn’t hit $1 trillion until January 2020.

Less than two years after reaching that milestone, Alphabet added nearly another trillion dollars, peaking just shy of $2 trillion in mid-November. Its market cap sits at $1.95 trillion, as of last week’s close.

It’s not just about advertising.

Revenue in Google’s cloud division climbed 45% to $4.99 billion in the third quarter, while operating loss narrowed to $644 million from $1.21 billion a year earlier. Google Cloud Platform trails Amazon Web Services and Microsoft Azure in the cloud infrastructure market, but it’s benefiting from an emerging multicloud trend, as big businesses spread their workloads rather than relying on a single vendor.

Alphabet also saw big returns from its investment arms GV and CapitalG. Portfolio companies including UiPath, Duolingo, Freshworks and Toast went public this year. Alphabet recorded investment gains of $188 million in the third quarter, up from $26 million a year earlier.

Freshworks CEO Girish Mathrubootham at the Nasdaq
Freshworks

Looking to 2022, analysts’ predictions are more muted, and Alphabet may need to find new growth drivers to continue its outperformance. Revenue growth is expected to slow to 17%, about where it was in 2019, before the pandemic.

Meanwhile, investors are still waiting for some progress out of Alphabet’s “Other Bets.” Its self-driving car company Waymo continues to lose a ton of money, though it made strides in new cities during 2021. Alphabet continues to consolidate other projects that haven’t been able to break out, announcing most recently that its folding Sidewalk Labs, its smart city efforts, into Google.

WATCH: Gene Munster on tech earnings

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