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How will advertising headwinds affect the Alphabet share price?

Alphabet's share price is set to continue performing strongly despite its reignited bickering with another tech giant Microsoft.

Tensions are escalating between the two tech giants of Alphabet and Microsoft after they ended the years-long ceasefire agreement, but Alphabet's growing cloud business will help to offset potential impact caused by the conflict.

The share price of Alphabet, Google’s parent company, has increased nearly 90% from its 52-week low of $1,402.15 seen on September 24, hitting the all-time high closing price at $ 2660.30 last Friday (July 23).

The same positive sentiment is also seen in Microsoft, which recorded a new all-time high of $289.67 on the same day when the market closed. 

54%

ALPHABET'S YTD SHARE PRICE RISE

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

THE BATTLE WITH MICROSOFT

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

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

In 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 as not being interoperable with that of 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," said Smith.

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

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

Although the fine would barely eat into the $181.69 billion revenue and $40.269 billion net profit reported in the fiscal year of 2020, there is the risk that fines could start to mount as more and more lawsuits are brought against Google.

BETTING ON THE CLOUD

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

Alphabet relies heavily on advertising sales — the segment accounted for 80% of the revenue in the fiscal year 2020, bringing in $146.92 billion. 

That said, its cloud segment has been growing rapidly. Cloud revenue grew 47% year-on-year to $13.06 billion in the 12 months to December 31 in 2020, up from $8.92 billion reported in 2019. The segment accounted for 7% of 2020 revenue, up from just over 5% of 2019 full-year revenue of $162 billion. Cloud sales for the first quarter of 2021 were $4 billion, up 46% year-on-year from $2.78 billion.

Although losses in its cloud business have gone up as revenues grew — $5.61 billion in 2020, $4.65 billion in 2019 and $4.35 billion in 2018, Alphabet is doubling down on its investment, which should pay off in the long run.

$146.92 BILLION

ALPHABET'S ADVERTISING SALES - 80% OF REVENUE IN FISCAL YEAR 2020

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 business 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. He increased it again at the end of the month to $3,127.

Google Cloud trails Amazon Web Services 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, which has climbed 14.09% year-to-date.

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