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How will advertising headwinds affect the Alphabet share price?

Despite a broad market sell-off that squeezed big tech stocks in the first half of 2021, the Alphabet  [GOOGL] share price is up 43% year to date and 70% in the last 52 weeks. 

The Alphabet share price has increased 79% on its 52-week low of $1,402.15, which it fell to on 24 September, and is 48% above its year low $1,697.86, recorded in January. 

After hitting an all-time high of $2,508.08 on 2 July, the Alphabet share price is currently trading just below at $2,505.15.

The same positive sentiment saw Microsoft [MSFT] record a new all-time high of $278 on the same day, while Facebook [FB] had hit an all-time high of $358.14 earlier in the week of 28 June to 2 July.

43%

Alphabet's YTD share price rise

  

The S&P 500 and Nasdaq Composite also closed the week at record highs. The most recent job report has given Wall Street greater confidence about the recovery of the US economy.  This reduced bond yields and pushed stocks higher.

 

Will Microsoft battles hit the Google share price?

The all-time high comes as Google has reignited its feud with Microsoft. Given the recent movement of the Alphabet share price, this news has clearly not had a direct impact on the stock. But could there be trouble round the corner for the Alphabet share price?

The two behemoths signed a non-aggression pact back in 2015, but they reportedly decided not to renew it when it expired in April of this year.

That same month, Microsoft president and chief legal officer Brad Smith gave an interview to Bloomberg in which he complained about Google’s digital advertising tools not being interoperable with other companies: “If you want to advertise, if you want to sell advertising or buy advertising on the internet, you have to use Google's tools. We raised the concerns with them [Google] and they just turned a deaf ear.”

“If you want to advertise, if you want to sell advertising or buy advertising on the internet, you have to use Google's tools. We raised the concerns with them [Google] and they just turned a deaf ear” - Brad Smith

 

Google’s allegedly anti-competitive tactics have been cited in a number of antitrust cases that US states have filed against the search and advertising company. Google also faces legal issues around the world. The EU will open a formal investigation into Google’s digital advertising business by the end of the year, according to people familiar with the matter, according to Reuters

In June, France’s competition regulators fined Google €220m ($261m) for abusing its position within the ad-tech market. 

The fine would barely eat into the $181.69bn revenue and $40.269bn net profit reported in fiscal 2020. But as more and more lawsuits are brought against Google, there is the risk that fines could quite easily start to mount up. 

 

Betting on the cloud

Could a growing cloud segment help to offset any impact future legal action might have on its advertising segment and the Alphabet share price?

Alphabet relies on advertising for the bulk of its sales — the segment accounted for 80% of fiscal 2020 revenue, bringing in $146.92bn. But its cloud segment has been on the rise. Cloud revenue grew 47% year on year to $13.06bn in the 12 months to 31 December 2020, up from $8.92bn reported in 2019. The segment accounted for 7% of 2020 revenue, up from just over 5% of 2019 full-year revenue of $162bn. Cloud sales for Q1 2021 were $4bn, up 46% year on year from $2.78bn. 

Although losses in its cloud business have been getting wider as revenues grow — $5.61bn in 2020, $4.65bn in 2019 and $4.35bn in 2018 — Alphabet is doubling down on investment, which should pay off in the long run. 

$146.92billion

Alphabet's advertising sales - 80% of fiscal 2020 revenue

  

Wedbush analyst Ygal Arounian believes there could be more upside for the Alphabet share price. In a note to clients, seen by The Street, Arounian said the cloud presents “a large market opportunity that we expect to have accelerated coming out of the pandemic”. 

As well as maintaining a grip on the advertising market, the company can “drive long-term sustainable top-line growth in its burgeoning cloud business,” said Arounian.

At the time the note was issued in mid-April, his target for the Alphabet share price was raised from $2,470 to $2,953. It was increased again at the end of the month to $3,127. 

Google Cloud trails Amazon Web Services [AMZN] and Microsoft Azure in the race for dominance in the cloud market. Alphabet, Amazon and Microsoft are top holdings in the First Trust Cloud Computing ETF [SKYY], which has climbed 11.9% in the year to date (through 2 June).

Disclaimer Past performance is not a reliable indicator of future results.

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