There are a lot of people who want back in the market now after exiting in December and hanging out on the sidelines since -- and irascible Mr. Market is not giving them many chances, explains Jon Markman, editor of Strategic Advantage.
Earnings growth and guidance have been a little lackluster this reporting season, but they have been so much better than expected in the grim depths of December that bulls are ascendant.
Alphabet (GOOGL) posted strong results after the close Monday, Feb. 4. Despite surging sales and rising profits, the stock was knocked lower in after-hours trade. Traders were gloomy because the Mountain View, Calif., company continues to invest aggressively in data centers, office space and engineering talent.
Their dejection is misplaced. Alphabet is investing to secure a piece of the future of computing. Long-term investors should use further weakness to start, or add to, positions.
It’s easy to become distracted. We live in a world of swipes, taps and instant gratification. But big things take time. Amazon (AMZN), Microsoft (MSFT) and Alphabet are building out future networks. As billions of new devices and sensors come online, almost all of them will be connected to the web of undersea cables, servers and software they are putting together right now. Getting it right is vital.
And that costs money now, lots of it. Capital expenditures at the search giant increased 102% in fiscal 2018, to $25.1 billion. Spending was $6.85 billion in the fourth quarter alone. And headcount continues to swell.
The company ended 2018 with 98,771 employees, a 23% increase over the previous year. During the company’s conference call, chief financial officer Ruth Porat noted that most new hires occurred in the cloud division.
Last week, Microsoft reported it spent $16 billion in 2018, upgrading and building out its data center network. And while Amazon is notoriously reluctant to disclose any information about infrastructure spending, its capital lease program suggests it’s spending at a $10 billion annual run rate recently.
The scale of these numbers seem to defy logic but investors should keep in mind the size of the opportunity. Gartner, a leading tech research and consulting firm, in 2016 called cloud first strategies the foundation for enterprises to stay relevant in the digital world. Analysts projected a $1 trillion market opportunity by 2020.
The managers at Alphabet are thinking big. Dianne Greene was replaced by Thomas Kurian as chief executive officer at Google Cloud. The veteran of Oracle (ORCL) will focus on outreach to enterprise customers. The number of cloud platform deals of $1 million or greater doubled during 2018, contributing to the $6.5 billion “other revenues” segment during the quarter.
Overall, sales increased 22% year over year to $39.3 billion during the fourth quarter. Full year revenue jumped from $110 billion in 2017, to $136.8 billion during 2018. Quarterly net income was $8.95 billion compared to a loss of $3 billion a year ago.
There is no way around the obvious. Alphabet is an impressive business in a fast-growing sector. Traders may freak out because the company continues to invest in infrastructure, but they are missing the bigger picture.
Shares trade at only 24.2x forward earnings. This is inexpensive given the prospects for future growth. I'd like to add Alphabet to our IMF Buy List after a pullback, which should be brief. Figure $1090 to $1100 area as a good place to start.
