Alphabet (GOOGL), formerly called Google, maintains the largest online index of websites accessible through automated search technology and generates revenue through online advertising, cloud services, and hardware, explains Joseph Bonner, CFA, of Argus Research.
We see Alphabet as one of the tech industry’s leaders, along with Facebook (FB), Apple (AAPL), Amazon (AMZN), and Microsoft (MSFT); these companies have come to dominate new developments in mobile, public cloud, and big data analytics, as well as emerging areas such as artificial intelligence and virtual/augmented reality.
Alphabet also owns YouTube, the web-based video site, and has expanded into mobile telephony with its Android smartphone operating system. About 54% of Alphabet’s revenue is generated outside the United States.
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The Department of Justice antitrust complaint against the company — filed on October 20, 2020 — had been hanging over GOOGL shares for many months, so the actual filing was not much of a surprise. State attorneys general piled on with their own federal anti-trust suits in December.
We think these anti-trust cases are serious, though it will probably take years for them to play out and they may be difficult to prove in court. The company faces headline risks over the lawsuits in the near term and possible sanctions if the litigation goes against it.
Although COVID-19 is impacting Alphabet’s advertising business in the near term, and the depth and duration of the pandemic are unclear, there are very few businesses with the resources and reach of Alphabet.
The company has the financial resources to weather the storm and may come out even stronger after the crisis recedes. Alphabet has been cutting costs in the crisis, though the company will continue to invest in core drivers like Search, Machine Learning, and Google Cloud. GOOGL shares appear attractively valued given the company’s rapidly expanding businesses.
We believe that the shares remain attractively valued given the company’s rapidly expanding businesses. Alphabet’s lagging EV/EBITDA multiple of 21 is below the peer median of 24.5. The forward EV/EBITDA multiple of 13.1 is 10% below the peer average, compared to an average premium of 4% over the past two years.