Analysts' Choice: Alphabet Has A Lot Going On

2/13/2017


  Recent Price
$830
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
24
  Shares (millions)
700
  Long-Term Debt As % Of Capital
3%
  52-Week Price Range
$867.00 - $672.66

Alphabet ($830; GOOGL) doesn't own the entire world yet, but not for lack of trying. With interests ranging from internet search to automated cars, from maps to e-commerce, the company most people still call Google has dipped a toe into a lot of businesses.

That strategy has paid off big time. Alphabet's sales rose 20% over the last 12 months and 18% annually over the last three years. Per-share profits jumped 22% last year, capping off three-year annualized growth of 12%.

Google never looks cheap relative to the rest of the market. However, in the wake of recent price weakness, its trailing price/earnings ratio has dipped to 24 — 18% below its own three-year average. The expected year-ahead P/E ratio of 20 is 16% below the median internet-software stock in the S&P 1500 Index. The stock is a Focus List Buy and a Long-Term Buy.

Reasons for optimism

Analysts expect that growth train to keep chugging, at least for the top line. The consensus calls for sales growth of 18% this year and 16% in 2018. Consensus targets for per-share profits reflect a 3% dip this year, followed by 17% growth next year. In part, the 2017 forecast reflects the company's decision to include stock-based compensation expenses in its adjusted earnings.

While cost pressures and moves into lower-margin businesses will pressure profit growth, a 3% decline in per-share profits next year seems like an overly harsh judgment, considering Google's business mojo:

• In the December quarter, paid clicks on Google's online advertisements rose 43% from the same period a year earlier and 23% from the September quarter. This growth more than offset declines in cost-per-click.

• Revenue for the famous "other bets" unit jumped 162% in the December quarter. Other bets works on early-stage technologies. This unit is developing self-driving cars, learning thermostats, and products for robotic surgery.  

• At year-end 2016, Google held $86 billion in cash and securities, the equivalent of $123 per share and up from $73 billion a year earlier.

Why are we so confident in Alphabet's year-ahead appeal? It's about more than the list of good news we just presented. Historically, Google has proven itself truly special. Over the last 10 years, the company has averaged quarterly sales growth of 25%, without a single decline. Operating-cash-flow growth averaged 27%, with just one decline. To put this in perspective, only 32 components of the S&P 500 Index haven't posted a sales decline in the last 10 years, and only two companies have managed just one dip in operating cash flow.

Alphabet's Teflon business model works in all types of conditions.

Satellite sale

Alphabet is selling its Terra Bella satellite-imaging company and its seven satellites in orbit to Planet Labs in exchange for an undisclosed stake in the start-up company. Don't dismiss the sale as Google pulling back from a big idea; the company expects to save money by purchasing imagery rather than managing the satellites itself.

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

ALPHABET
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '16
9.36
vs.
8.67
22%
839.00
-
783.50
25 - 23
Sep '16
9.06
vs.
7.35
20%
803.94
-
672.66
25 - 21
Jun '16
8.42
vs.
6.99
21%
810.35
-
682.01
27 - 22
Mar '16
7.50
vs.
6.47
17%
798.69
-
687.78
27 - 23
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
90.27
34.34
0.00
839.00
-
672.66
24 - 20
2015
74.99
29.48
0.00
798.69
-
489.57
27 - 17
2014
66.00
25.58
0.00
612.76
-
495.83
24 - 19
2013
59.83
23.29
0.00
558.97
-
346.81
24 - 15
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
89
90
51
96
97
85
29

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


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