Analysts' Choice: Buy Alphabet, The Big, Bad Bully

2/8/2016


  Recent Price
$749
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
25
  Shares (millions)
694
  Long-Term Debt As % Of Capital
2%
  52-Week Price Range
$789.87 - $515.18

Two of Alphabet's ($749; GOOGL) most troubling weaknesses involve its own renown.

1) The financial media hum with stories about Alphabet's antitrust probes and foreign tax issues.

2) Alphabet sticks its fingers in more pies than a pastry chef. Smartphone platforms, self-driving cars, drones, facial-recognition software, biotech R&D, and artificial intelligence — not to mention the Google search engine. When you do so much, you make enemies and attract scrutiny.

Of course, those two weaknesses are also Alphabet's greatest strengths. Name recognition can keep a stock at the top of investors' minds, and Alphabet's incredible reach exposes it to many potential growth markets.

In the December quarter, the company's per-share profits rose 28% on 18% higher sales, topping the consensus for both stats and marking the eighth consecutive quarter of double-digit sales growth. We rate the stock a Focus List Buy and a Long-Term Buy.

Lots going on

Alphabet's core business — the Google search engine, YouTube, Android, Chrome, Google Play, Chromebooks, apps, and cloud-computing software — delivered growth of 18% in revenue and 30% in operating profits in the December quarter.

Remember those pies we mentioned earlier? Alphabet has grouped many of them into a business unit called Other Bets, which accounted for less than 1% of revenue in the December quarter. These businesses — which range from broadband internet to venture capital to virtual reality — combined to lose $3.6 billion for the year.

While we doubt all of the company's initiatives will pay off, some should, and Alphabet boasts cool technology. Investors sure seem excited, bidding the shares up 15% since the end of September, versus 1% for the S&P 1500 Technology Sector Index. The internet giant overtook Apple ($96; AAPL) as the largest stock by market value early this month.

To the victor go the hassles

The BrandZ Top 100 Most Valuable Brands study pegs Google at No. 2
worldwide with a value of nearly $174 billion. You can neither hide nor fake that kind of power. Alphabet has become today's big, bad bully. It controls the world's most popular search engine (four times as popular as Bing) and smartphone platform (Android held nearly 85% of the global market in the third quarter of 2015), plus an e-mail service used by a billion people.

The European Union is pursuing an antitrust case against Alphabet, alleging the company skewed search results to favor its own websites. A $185 million tax settlement with the U.K. in January drew criticism for letting Alphabet off easy, and other European countries are pursuing back taxes, including Italy's $327 million claim.

Alphabet's critics will not go away any time soon. However, bad press shouldn't affect its operations. The consensus projects growth of 16% for sales and per-share profits this year, beatable targets given Alphabet's operating momentum.

You can obtain an annual report for Alphabet Inc. at 1600 Amphitheatre Parkway, Mountain View, CA 94043, (650) 253-0000, investor.google.com.

GOOGLE
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '15
8.67
vs.
6.76
13%
752.50
-
593.09
27 - 21
Sep '15
7.35
vs.
6.25
11%
713.33
-
532.23
27 - 20
Jun '15
6.99
vs.
5.98
12%
584.70
-
520.29
23 - 20
Mar '15
6.57
vs.
6.27
15%
565.60
-
489.57
22 - 19
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
66.00
29.58
0.00
612.76
-
495.83
21 - 17
2014
59.83
25.26
0.00
558.97
-
346.81
22 - 14
2013
50.18
21.95
0.00
386.13
-
277.50
18 - 13
2012
37.91
19.88
0.00
322.49
-
235.86
16 - 12
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
78
79
18
94
95
84
92

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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