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Google is Experiencing Accelerated Growth

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Stock (Symbol)

Alphabet (GOOGL)

Stock Price

$1,073

Sector
Technology
Data is as of
January 2, 2018
Expected to Report
Feb 1
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. Source: Thomson Financial
Sharek’s Take
David SharekAlphabet (GOOGL) grew at a blistering pace last qtr. Sales growth of 24% was the highest in years. Profit growth was 6%, but would have been 28% if it weren’t for an accounting change. Google Cloud, Play and hardware had 40% revenue growth.  After the company reported, analysts pushed up profit estimates. 2017’s went from $30.59 to $32.29, with 2018’s going from $39.99 to $41.56 and 2019’s from $46.86 to $48.58. Wow, that would be almost $50 in profits next year and with profits expected to climb 29% next year, a P/E of 30 on this stock is very fair. So just looking to next year hypothetically: 30 x $50 = $1500. That’s a guesstimate. Not only does Alphabet have solid growth opportunity, it is also one of the safest stocks in the stock market. The company just switched its accounting practices to a more conservative stance to account for stock options. This lowered profits, but investors rewarded the stock with a higher P/E ratio. Google, Microsoft and Priceline are the only three tech stocks that I know of that account for stock options in their profit statements. And profits is what GOOGLE is good at. It’s grown profits every year since it went public and the company’s total cash balance has gone from $86 billion to $100 billion through the first nine months of 2017. Longer term, this company has the might to conquer AI, which will be a future catalyst for growth. The company just rolled out new machine learning features for Google Maps, YouTube, Gmail and Google Photos. YouTube gets more than 100 million hours of watch time in the living room per day, that’s up 70% from last year. Google is growing great, has a reasonable P/E of 26, has good upside, and continues to take market share in advertising. As of 2017 Q2, digital advertising is 40% of overall ad sales (source: Interactive Advertising Bureau). And Pivital Research says 83% of all digital ad growth in the qtr was from Facebook and Google. This stock is an excellent selection for both conservative investors and investors seeking growth.
One Year Chart
These qtrly profit numbers are poor because GOOGL had that accounting change a year ago. Still, GOOGL was expected to have profits decline 8% last qtr and came through with 6% growth as it beat the street. Not only did it beat, but the news was so good estimates jumped across the board. Now Estimates for the next 4 qtrs are 7%, 20%, 95% and 12%. Note the 95% figure is due to eay comparisons to the year-ago period where the company had a special charge (a fine from the EU). Nice Est. LTG of 21% a year, that’s up from 19% last qtr. P/E of 26 is reasonable.
Fair Value
This stock used to sell for around 20x earnings. But investors warmed up to the company a few years ago after it became more shareholder friendly and the P/E got to 22. But that was when profits were growing in the high-teens. GOOGL is growing in the high-20s now, and thus deserves a P/E of 30 in my eyes. Also, the more conservative accounting helps the P/E.
Bottom Line
Alphabet has been a solid stock since it went public, and has reported record profits each year. Although 2017 might be a down year, there’s a good excuse for that. In fact, GOOG is growing like the old days. With the stock market hot, and the S&P 500 attracting investors, this big company could have a solid year in 2018. GOOGL ranks 31st in the 34 stock Growth Portfolio Power Rankings and 20th in the 33 stock Conservative Portfolio Power Rankings.
Power Rankings
Growth Stock Portfolio

20 of 39

Aggressive Growth Portfolio

N/A

Conservative Stock Portfolio

2 of 32

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David Sharek David Sharek is stock portfolio manager and CEO of DavidSharek.com. David believes a company's profits ultimately drive the price of its stock. His book The School of Hard Stocks can be found on Amazon.com.