Analysts' Choice: Alphabet Rewards Patient Investors

8/15/2016


  Recent Price
$808
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
25
  Shares (millions)
746
  Long-Term Debt As % Of Capital
2%
  52-Week Price Range
$810.35 - $565.05

Unlike many companies, Alphabet ($808; GOOGL) shows little concern about massaging investor expectations. It declines to offer a formal profit outlook or guidance on the metrics analysts use for their financial models. And it will invest heavily in projects that may take years to pay off — if they do at all.

That attitude can occasionally lead to messy results, such as in the March quarter, when the internet search giant missed analyst forecasts for earnings per share and sales. But Alphabet got back on track in the June quarter, as both per-share earnings and revenue rose at least 20%, comfortably topping consensus expectations.

The stock's Quadrix Overall score has rebounded to 87 from 58 at the end of May, helped by improving ranks for Momentum (94 versus 67) and Earnings Estimates (96 versus 29). The stock has also surged 17% since the end of June, outpacing the S&P 500's 4% gain. Alphabet, already a Buy and a Long-Term Buy, is being added to the Focus List.

Mobile as a growth vehicle

Alphabet's Google search business is one of the biggest beneficiaries of the shift to online spending. The company continues to dream up new ways to boost online activity, from beaming the internet to remote regions via balloons to transmitting the internet through eyeglasses and automobiles.

Management said rising usage of its mobile search helped drive growth in advertising sales, up 19% last quarter. Paid clicks, or the volume of Google ads clicked on by internet users, rose 29%, marking the fourth straight quarter of growth in excess of 20%. Cost-per-click, or the average ad price, decreased 7%, its slowest decline since the March 2015 quarter. Mobile ads tend to be less expensive than those displayed on personal computers. However, ad prices between the two formats seem likely to converge eventually. After all, mobile ads let advertisers target customers based on location, improving their conversion rates.

Alphabet shows little sign of slowing down its investment in research and development. However, it has reined in some of its spending since hiring Morgan Stanley ($29; MS) alum Ruth Porat as CFO in March 2015. Operating expenses as a percentage of sales hit a record high for Alphabet last year but has declined in each of the past three quarters. Operating profit margin has also improved in three straight quarters.

In the June quarter, the company completed its first stock-buyback plan, totaling $5.10 billion. Management gave no word on plans for more share repurchases or a dividend launch.

Conclusion

The stock's low Value score of 34 is somewhat misleading. At 25 times trailing earnings, the stock trades in line with the median for S&P 1500 internet companies. Excluding net cash of $105 per share, the stock's trailing P/E ratio is 22.

Analyst estimates are rising, with the consensus projecting earnings per share of $8.63 in the September quarter, up 17% on revenue growth of 18%.

An annual report for Alphabet Inc. is available at 1600 Amphitheatre Parkway, Mountain View, CA 94043, (650) 253-0000, investor.google.com.

ALPHABET
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '16
8.42
vs.
6.99
21%
790.95
-
672.66
26 - 22
Mar '16
7.50
vs.
6.47
17%
810.35
-
682.01
27 - 23
Dec '15
8.67
vs.
6.76
18%
798.69
-
631.11
29 - 23
Sep '15
7.35
vs.
6.25
13%
713.33
-
539.76
27 - 20
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
74.99
29.48
0.00
798.69
-
489.57
27 - 17
2014
66.00
25.26
0.00
612.76
-
495.83
24 - 20
2013
59.83
21.95
0.00
558.97
-
346.81
15 - 16
2012
50.18
19.88
0.00
386.13
-
277.50
19 - 14
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
87
94
34
96
97
96
53

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


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