With Alphabet, look past PR problems

Recent Price $2,838
Dividend $0.00
Yield 0%
P/E Ratio 27
Shares (millions) 680.3
Long-Term Debt as % of Capital 5%
52-Week Price Range $3,019.33 - $1,694.00

 

Alphabet ($2,838; GOOGL) generates so much news that we could fill up this entire space with timely reportage, never touching on the Focus List Buy’s investment merits, a topic we at the Forecasts find both more interesting and more important. But the news is real, and sometimes headline risk morphs into market risk.

So, with dual priorities in mind, we’ll start with . . .

Why investors worry

Last month, Australia became just the latest government to target Alphabet on antitrust grounds, in this instance trying to limit how aggressively the company can use data gathered via online searches to market targeted ads. American, British, and EU regulators are mulling similar moves. Past antitrust actions have attacked:

• Contracts that require customers to use Alphabet’s networks and products, muscling competitors out of its markets, particularly online advertising.

• The Google search engine’s policies regarding which sites get top billing — and favoring its own shopping comparison system.

• Dominant smartphone operating system Android’s insistence that handset makers preinstall its preferred applications.

European regulators have proven themselves the most active Alphabet hunters, levying more than $9 billion in fines in recent years. Alphabet challenged all of these rulings in court and has yet to pay up.

While every one of the issues presented above could potentially drive Alphabet to alter its business practices, we don’t worry much on that front, as most of the cases will take years to adjudicate, the company has the cash to pay fines if needed, and Alphabet has a long history of adapting to change without losing its edge. Let’s look past the Everybody Hates Google show and consider . . .

Why investors should buy

Just about all of Alphabet’s legal and regulatory challenges revolve around the fact that it has created digital platforms that have grown ubiquitous enough to afford the company massive negotiating leverage. That leverage has paid off in the form of incredible growth, with annualized gains of 21% in sales and 43% in per-share profits over the last decade.

Analysts target sales growth of 39% this year and 17% in 2022, with per-share profits up 83% and 4%, respectively. Since the company topped the September-quarter profit consensus by 20%, analyst targets for 2022 and 2023 have risen at least 5%, yet the 2022 profit estimate still seems way low.

Digital-advertising revenue grew 43% in the September quarter. Google is gaining share in the cloud and investing billions in such initiatives as machine learning, quantum computing, self-driving vehicles, and drones — businesses with the potential to open up huge new markets.

All this growth comes at an appealing price. Alphabet trades at 27 times projected 2021 earnings, in line with the median for interactive-media companies despite its market leadership and wealth of long-term growth initiatives. Google is among our top picks for year-ahead gains.

Alphabet Inc., 1600 Amphitheatre Parkway, Mountain View, CA 94043, (650) 253-0000, www.abc.xyz.

 

Quarter Per-Share Earnings* Sales Change Quarterly Price Range P/E Ratio
Range
Sep '21 $27.99 vs. $16.40 41% $2,925.08 - $2,430.63 32 - 26
Jun '21 27.26 vs. 10.13 62% 2,461.91 - 2,091.43 33 - 28
Mar '21 26.29 vs. 9.87 34% 2,145.14 - 1,696.10 37 - 29
Dec '20 22.30 vs. 15.35 23% 1,843.83 - 1,433.23 36 - 28

 

Year
(Dec.)
Sales
(Bil.)
Per-Share Earnings* Per-Share
Dividend
52-Week Price Range P/E Ratio
Range
2020 $182.5 $58.61 $0.00 $1,843.83 - $1,008.87 31 - 9
2019 161.9 52.38 0.00 1,367.07 - 1,022.37 26 - 20
2018 136.8 43.70 0.00 1,291.44 - 977.66 30 - 22
2017 110.9 32.01 0.00 1,086.49 - 796.89 34 - 25

 

Quadrix Scores
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Perform-
ance
Reversion
88 93 38 98 98 78 74 7

 

* Earnings exclude special items.
NA Not Available.
Quadrix® scores are percentile ranks, with 100 the best.
e Dividend and yield estimated.