I am neutral on Alphabet (GOOGL) as it enjoys substantial competitive advantages and its price target implies strong total return potential, while Wall Street analysts are overwhelmingly bullish on it.
Alphabet – often referred to simply as Google – is an international technology company specializing in Internet-related products and services.
These include hardware, online advertising, software, search engine, and cloud computing. It was founded in 1998 by Sergey Brin and Larry Page. Together, they own approximately 14% of the company’s publicly listed shares and have 56% voting power.
In 2004, the company went public, and in 2015, the company was recognized as a subsidiary of Alphabet Inc. Page left the C-suite from Google when Sundar Pichai was appointed as the new CEO. Now, Page is the CEO of Alphabet.
Out of Google’s several strengths, two of its most prominent strengths are that 70% of all online search queries need Google, and approximately 80% of all smartphones need Android.
Therefore, it isn’t too surprising to understand that it is the largest Internet advertising company in terms of annual revenue. The company wisely leverages these strengths to get its users into an ecosystem with different apps like Google Now, Maps, YouTube, Drive, and Gmail.
These applications gather information from different users, enabling Google to improve its targeted ads throughout its platform.
In the quarter that ended on September 30, Alphabet announced revenue of $65 billion, a 41% year-over-year increase since.
Operating income increased by 32% (from $11 billion to $21 billion), and diluted earnings per share went from $16.40 to $27.99.
More than half of Google’s revenue came from Google Search ($37.9 billion), while YouTube ads had the second-biggest share ($7.2 billion).
GOOGL stock looks reasonably priced here as it trades reasonably in line with its historical averages on both an enterprise value-to-EBITDA ratio and price-to-normalized earnings basis.
Its enterprise value-to-EBITDA ratio is 14.6x compared to its historical average of 13.4x, and its price-to-normalized earnings ratio is 24.8x compared to its historical average of 26.7x.
Wall Street’s Take
According to Wall Street analysts, GOOGL earns a Strong Buy analyst consensus based on 26 Buy ratings, two Hold Ratings, and zero Sell ratings in the past three months. Additionally, the average GOOGL price target of $3,387.59 puts the upside potential at 26.9%.
Summary and Conclusion
Alphabet is a dominant global tech company that enjoys a wide moat in many of its online businesses, including Google Search, Gmail, and YouTube.
It enjoys extremely high profitability, consistently strong growth, and owns a treasure trove of data. On top of that, it should be able to leverage its world-class workforce to continue innovating while leveraging its data to thrive in the era of artificial intelligence.
On top of that, the stock looks reasonably priced here relative to its historical multiples, Wall Street analysts are overwhelmingly bullish on it and the average price target implies strong upside potential.
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