Analysts' Choice: Focus On Alphabet's Growth, Not The News

7/31/2017


  Recent Price
$965
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
28
  Shares (millions)
704
  Long-Term Debt as % of Capital
3%
  52-Week Price Range
$1,008.61 - $743.59

It seems as if Alphabet ($965; GOOGL) constantly makes headlines. Many of them negative.

In recent weeks, we've seen stories about:

• France suing over $1.3 billion in alleged back taxes (Alphabet won in court, but the battle isn't over).

• The European Union fining Alphabet a record $2.7 billion over its supposed manipulation of online search results (Google has 90 days to comply with the ruling or face more fines.)

• The U.S. Department of Labor suggesting Google's confidentiality agreements have prevented employees from reporting discrimination.

These and other pieces of bad news could lead to even more scrutiny going forward, a recipe for additional negative headlines. Not that it should matter much for investors. Despite enduring a steady stream of public criticism and legal battles over the last year, shares of Alphabet, a Focus List Buy and Long-Term Buy, have gained 22% year-to-date and 30% over the last 12 months.

A growth story

Credit strong growth (sales up 21%, per-share profits 10%, and operating cash flow 24% over the last year) for the shares' resilience. Profit growth will appear artificially low this year because the company has begun including employee option expense in its adjusted earnings. In the June quarter, stock-based compensation totaled $2 billion, about 23% of the company's $8.4 billion in income excluding the costs. However, sales continue to march higher.

Despite its size and ubiquity, Alphabet still has growth levers to pull. According to researcher NetMarketShare, Google drove 94% of mobile-search traffic last year. With mobile usage still on the rise (mobile devices now account for nearly 70% of global internet time, up from 53% three years ago), nobody is better positioned to cash in than Google. While advertising remains the core moneymaker, Alphabet has begun to generate revenue from its Maps application and is working on ways to monetize more products from its famous Other Bets unit, which includes car automation and life sciences.

Better-than-expected results

In the June quarter, Alphabet earned $8.90 per share excluding special items, up 6%. Factoring in the impact of stock-based compensation in both the June quarter and the year-ago period, operating income rose 22%, roughly in line with sales growth of 21%, which also topped analyst targets. Including the $2.74 billion fine from the EU, Alphabet earned $5.01 per share, above the $4.46 consensus. Ad sales, which account for about 87% of total company revenue, rose 18%. While price per ad click fell 23%, clicks jumped 52%. The company cited YouTube as a key driver of advertising growth, mostly via video ads.

Other revenue, a category which includes cloud computing, online games, and hardware, grew 42% in the quarter. Going forward, nonadvertising businesses should continue to set the growth pace; Alphabet cited the cloud unit as one of its fastest movers.

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

Alphabet
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '17
8.90
vs.
8.42
21%
1,008.61
-
834.60
29 - 24
Mar '17
7.73
vs.
7.50
22%
874.42
-
796.89
25 - 23
Dec '16
9.36
vs.
8.67
22%
839.00
-
743.59
25 - 22
Sep '16
9.06
vs.
7.35
20%
819.06
-
699.00
26 - 22
           
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
65
68
33
97
97
12
75

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


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