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It’s Time Alphabet Got the P/E it Deserves

 

Stock (Symbol)

Alphabet (GOOGL)

Stock Price

$781

Sector
Technology
Data is as of
November 7, 2016
Expected to Report
Jan 27
Company Description
googleAlphabet Inc is a collection of Companies. Alphabet’s collection include Calico, Google’s health and longevity effort; Nest its connected home business; Fiber, its gigabit internet arm; and its investment divisions such as Google Ventures and Google Capital, and incubator projects, such as Google X. These will be managed separately in Alphabet. On October 2, 2015, Google implemented a holding company reorganization pursuant to the Agreement and Plan of Merger (the Merger Agreement), dated as of October 2, 2015, among Google, Alphabet and Maple Technologies Inc., a Delaware corporation (Merger Sub), which resulted in Alphabet owning all of the outstanding capital stock of Google. Pursuant to the Alphabet Merger, Merger Sub, a direct, wholly owned subsidiary of Alphabet and an indirect, wholly owned subsidiary of Google, merged with and into Google, with Google surviving as a direct, wholly owned subsidiary of Alphabet. Source: Thomson Financial
Sharek’s Take
David SharekAlphabet (GOOGL) hasn’t been getting the respect it deserves. For more than a decade now the company has consistently delivered profit growth of around 20% a year with record profits each and every year. Last qtr was more of the same, with profits up 23%. Normally companies that deliver steady consistent growth get rewarded with P/Es 1.5x to 2x their growth rates (or Est LTG). GOOGL’s Est LTG is 19% a year, and I think the P/E could be 28. Yet the stock has a P/E of just 19 (using 2017 earnings estimates), down from 23 last qtr (on 2016 est.). I think its time Wall Street gave Alphabet the respect — and multiple — it deserves. Part of the reason GOOGL hasn’t gone up as much as it should is growth stocks were out of favor from July 2015 through July 2016. But since Summer growth stocks have been back en Vogue — until Trump got elected President last week and money quickly flowed into banks. I feel the best growth is still found in Internet stocks. Technology stocks are on pace to grow earnings 11% in Q3, and I expect them to have a banner year in 2017. My Fair Value for this stock is $1026, which is 25x earnings and represents 31% upside in the coming year as well as 53% upside by 2018.
One Year Chart
googl_2016_q4Last qtr GOOGL came in a 20% gain in sales as profits rose 23%, and cruised past the 17% estimate. But with GOOGL you can’t assume the company will beat again because sometimes it throws a miss in there (3QtrsAgo) and then everything gets messed up. Profit Estimates went up a little bit this qtr and now analyst feel the company will grow 11%, 25%, 19% and 15% the next 4 qtrs. Note that 25% qtr is against easier comparisons from the year-ago when profits increased just 14% (that’s the qtr GOOGL missed estimates). I’m surprised the P/E is just 19 considering the Est LTG is 19% per year. The P/E should be higher.
Fair Value
googl_2016_q4_phThis stock had a P/E of 40 ten years ago because it was growing much faster. The P/E declined to 16 by 2010 and then rose to 22 in 2014 and has held steady since. I personally think the P/E should go up to 25 next year and that would be excellent for the stock. Again, the P/E was 23 just last qtr so I’m not asking for much here.
Bottom Line
googl_2016_q4_10yrGoogle has been a core holding for growth investors ever since it went public at $85 in 2004. Today this stock offers above average safety and a robust 19% Estimated Long-Term Growth Rate. I feel GOOGL is well worth 25x earnings which equates to more than $1000 a share. Don’t get fooled by the recent selloff in Internet stocks, they offer the best growth rates and also the biggest values of any stocks I’m aware of. GOOGL ranks 1st in the Conservative Portfolio Power Rankings and 7th in the Growth Portfolio and Aggressive Growth Portfolio Power Rankings.
Power Rankings
Growth Stock Portfolio

7 of 36

Aggressive Growth Portfolio

7 of 18

Conservative Stock Portfolio

1 of 30

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