The Strategist

Is it worth investing in Alphabet?

02/11/2019 - 11:16

Despite Alphabet’s good reporting, investors are worried about the company's rising spending.

brionv via flickr
brionv via flickr
Although the firm surpassed Wall Street's expectations for profits and revenues, the combination of rising costs and falling advertising prices caused shares of the corporation to fall by more than 2% on the day the results were published.

Investors fear that rising costs and falling prices will ultimately affect Google’s growth performance. Nevertheless, many analysts believe that there are still many reasons for acquiring the company's securities, especially at a reduced price. 

1. Alphabet’s business is booming.

Of course, there were some unpleasant moments in the reporting of the company. But earnings per share, revenue, and sales in the field of cloud computing and hardware were better than analysts had expected.

Investors may be concerned about the increase in spending on attracting traffic (they grew by 13% compared with the last year), the figure was 23% of the holding's advertising revenues. At the same time, total revenue from advertising grew by 20%. In general, although Google’s spending is growing, the business is also developing quite fast.

2. Google search is a leader among competitors.

Wall Street legend Warren Buffet once said that he always prefers companies with strong competitiveness. The Google search engine dominates the online search market, and its enormous scale and technological advantages will prevent other companies from becoming leaders even over time.

According to NetMarketShare, Alphabet accounts for 78.2% of search queries made using a PC and 79.4% of requests from mobile devices. The results would have been much better if Google had not been banned in China, where almost 17% of the global share of the mobile search market belongs to its Chinese competitor Baidu.

3. Alphabet’s shares can be risk-proof

Over the past decade, the Nasdaq Composite hasbeen growing largely thanks to shares of companies from the FAANG group. However, the P/E  ratio of Amazon and Netflix exceeds 50, which is one of the highest estimates among all companies of the index. In turn, Facebook still cannot get out of its own problems related to violation of user data privacy.

The reasonable P/E indicator of Alphabet and the company's stable business make it the safest among all FAANG members. The corporation has never been a dividend, but the impressive growth in free cash flow suggests that at some point it may start making payments.

4. Google Cloud has an impressive growth trajectory.

Investors were disappointed that Alphabet did not disclose its Google Cloud profitability in the fourth quarter, but management said it is "one of the fastest growing services in Alphabet." Growth of the other income segment, including Google Cloud, was 31%, and over the past year, the cloud division of Google doubled the number of transactions worth more than $ 1 million.

According to RightScale, Alphabet is the third largest cloud provider after Amazon and Microsoft. Nevertheless, according to Garnter, in 2019, the global cloud business will grow by 17.3% to $ 206.2 billion, creating many opportunities for all leading companies.

5. Youtube continues to gain popularity.

The video service is becoming more popular due to the fact that people are increasingly refusing to watch traditional TV. At the moment, the platform has 1.8 billion monthly users in 90 countries, daily number of views reaches 1 billion hours. 96% of Americans aged 18 to 24 use Youtube.

According to estimates by Morgan Stanley, over the past quarter, search queries for the service increased by 40%. Analyst Brian Novak says that over time, Youtube will continue to expand its promotional offers and will earn a growing number of views of the content.

6. Waymo is coming soon.

It is unlikely that automotive business will be the first association for Google. However, Waymo, which is based on Google’s autonomous vehicle management technology division, can make a lot more money for corporations than investors think.

Novak believes that Waymo's capitalization will reach $ 175 billion, more than the present value of Ford Motor, General Motors and Tesla combined. Last year, the company's cars drove 10 million test miles. At the same time, Uber, the main competitor of Waymo, drove just 3 million.

7. Future growth potential 

Long-term investors have many different reasons for looking at Google’s prospects with optimism. But Justin Post, an analyst at Bank of America, believes that the main wave of growth will come in the first half of 2019; he highlights the following among the main drivers:

- In the fourth quarter, the company's management announced that new search formats could have a positive effect on advertising growth;

- Youtube is gaining momentum and may become even more popular in the coming quarters;

- In April, the next Google Cloud Next conference will take place, during which the company's management will shed light on new aspects of its cloud business;

- Waymo will continue to grow, which will also lead to the growth of Alphabet.