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The ABCs of Alphabet

11/06/2019 5:00 am EST

Focus: TECHNOLOGY

Jon Markman

Editor, Tech Trend Trader, The Power Elite, and Strategic Advantage

For the three months ended September 30, Alphabet (GOOGL) reported 22% sales growth year over year, to $40.5 billion; to put this in perspective, the search giant has now reported 17 consecutive quarters of 20% or greater revenue growth vs the same period a year ago, explains Jon Markman, editor of Strategic Advantage.

It is the model of consistency. This is important because, after all of this time, most investors still misunderstand the scope of what is happening with respect to digital ad sales.

Slowly but surely, marketers are moving their ad budgets to digital and away from real world mediums like outdoor billboards, print media and television. And despite ad sales growth at Amazon (AMZN), and steady competition from Facebook (FB), Alphabet is still the 800 pound gorilla in the sector.

eMarketer, an online data analytics researcher, found in March that Alphabet accounted for 37.2% of total U.S. online digital ad sales during 2018.

The company has some of the best online properties, in Google Search, YouTube and Gmail. Soon product managers plan to bring Maps and other top tier Alphabet destinations into the monetization loop.

Meanwhile, the company continues to make other bets beyond digital ad sales. Waymo, the autonomous vehicle subsidiary, is now offering rider-only taxicab service in Phoenix, Ariz. This is an actual robo-taxi. There is no attendant in the vehicle.

And while robo-taxis still must get past regulators, investors should not ignore the scale of this opportunity.

McKinsey, a global consulting firm, estimates passenger miles travelled in a densely populated areas like Los Angeles could reach 30 billion by 2030. That could be as much as a $20 billion business opportunity in the L.A. market alone.

Waymo, and other bets, accounted for $155 million in sales during the quarter, versus $146 million a year ago. Losses swelled to $941 million, up from $727 million. However Ruth Porat, chief financial officer, stressed that Waymo is a long term investment and the company is pleased with the progress being made.

She expressed similar confidence for what is happening at Google Cloud. The company got a new chief executive earlier this year when Thomas Kurian was hired away from Oracle (ORCL).

Since that time he has been busy hiring sales staff and new managers. Those hires negatively impacted profitability during the quarter. Alphabet reported earnings of $10.12 versus the $12.42 analysts had been expecting, according to FactSet. 

However, the biggest contributor to the earnings shortfall was the mark to market value of Alphabet’s passive stakes in Uber (UBER), Lyft (LYFT) and other recent new issues. That accounting may have contributed as much as $1.5 billion in paper losses.

The bottom line is that investors should remain focused on the bigger trends. Alphabet’s digital advertising business is growing at about 20% year over year. That operation is spinning off cash that the firm is investing in potential future high growth sectors.

Currently, those businesses are sucking up money but Alphabet is well managed and in a great position to dominate those markets. Google shares trade at 23x forward earnings and 6x sales. These are reasonable multiples. The shares are buyable for growth investors on pullbacks.

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