We could devote a full page to this company every week just to keep up with the developments. But today, we’re going to forget all the outside forces and focus on five reasons to buy this Focus List stock.
While a stock’s price shouldn’t matter in a market where most stock trades cost nothing, the company’s high price drove away many investors and kept the company off price-weighted indices like the Dow Industrials. After a 20-for-1 split in July, these shares became more approachable.
2) Big Ideas
So far, Alphabet’s “Other Bets” unit hasn’t contributed much to the bottom line. Critics have long questioned the company’s heavy investment in venture-level projects ranging from autonomous driving to drone delivery to quantum computing to health-care and life-sciences ventures they rarely discuss.
Alphabet refers to these noncore businesses as moonshots, an apt description for big ideas with an equally large chance of imploding. Still, the information economy turns clever concepts into cold cash every day.
Since going public in 2004, Alphabet has averaged annual sales growth of 31%, never dipping below 8% for a calendar year. Per-share profits also rose every year, delivering average growth of 32%. Remember all that criticism the company received for posting negative profit growth for a couple quarters in 2020? Those transient declines stood out because of Alphabet’s history.
Google takes some heat because of its dependence on digital advertising, which still accounts for 81% of its revenue and pretty much all of its profits. But Alphabet has parlayed its size into strong positions in a variety of other businesses, such as mobile operating systems, cloud computing, data analytics, artificial intelligence, and virtual reality.
Over time, those faster-growing businesses should account for a higher percentage of company sales. The cloud business, once a tiny sliver of the company, now accounts for about 9% of revenue. Given an annual growth rate in the 30% range, cloud’s share of revenue should remain on the rise.
Analysts expect Alphabet’s per-share profits to fall this year, and estimates for this year and the next two years have declined in recent weeks. However, the current profit-growth targets of 15% in 2023 and 16% in 2024 seem low, assuming a return to a more typical business environment.
We’ll close with an area where Alphabet has rarely distinguished itself. V is for valuation. Down 30% so far this year, the stock trades at 18.5 times trailing earnings, in line with the median for internet-media companies.
Alphabet’s trailing P/E is 35% below its three-year norm of 28 and 40% below its 10-year norm of 31. The stock earns a Quadrix Value score of 64, well above the average of 42 for interactive-media companies and a record high for Alphabet.