Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) is in the red year-to-date, as are the major indices.
But investors shouldn’t see GOOG stock as a loser — because after a tremendous earnings report, this tech titan has a lot to offer.
After all, Alphabet shares are actually up over 40% in the last year despite recent volatility. Furthermore, it is now the largest U.S. corporation by market capitalization after recent declines for rival Apple Inc. (NASDAQ:AAPL).
The naysayers will continue to point to a lack of dividends, a long period of underperformance prior to 2013 and fears that rival Facebook (NASDAQ:FB) is supplanting it as the dominant force in online advertising.
But the bottom line is still the bottom line — and when you look at the numbers, you just can’t count out this parent company of Google.
Core Google Business Is Strong and Supports Innovation
Thanks to the 2015 move to restructure the company, Alphabet now reports two segments — Google, the core advertising and search operations, and an “Other Bets” segment that includes its ambitious but nascent projects.
This core Google segment saw impressive growth of 13.5% in FY2015 vs. FY2014 but an even more impressive 22.3% surge in operating income for this segment. That’s a great trend for this business segment that represents effectively all of current revenues and profits.
Google is serving more ads and at better margins, proving that the best can get even better. And these rising margins for GOOG stock are a huge driver of its success lately.
Of course, Alphabet stock is admittedly over-reliant on its Google segment, which makes up almost all of its total revenue. But its “Other Nets” segment contains efforts that are bold — and nobody knows what the future holds.
Years from now, the company could look dramatically different thanks to ambitious efforts in everything from life sciences to virtual reality to artificial intelligence. And in the latest quarter, overall headcount has surged 15% year-over-year as Alphabet staffs up and looks to the future.
Also noteworthy is that GOOG spent $869 million on capex in its “Other Bets” segment alone last year — which, in the recent earnings call, CFO Ruth Porat said was primarily earmarked for the company’s ambitious Google Fiber high-speed Internet project.
The most important thing of all is that Google’s strong operating metrics are supporting those ambitious efforts, and doing so at a way that doesn’t sap profits. Cost of revenues remained constant year-over-year despite that surge in hiring and capex. In fact, expenses as a percentage of revenue actually dropped slightly in Q4 for Alphabet.
That’s the right way to do things, and given the very strong metrics from the core ads and search biz of GOOG stock lately, it seems quite sustainable.
Alphabet Isn’t Afraid of Hard Choices
Growth has been there lately for Alphabet and Google, but admittedly that hasn’t always been the case. However, the good news is that executives have learned their lessons from past challenges and aren’t afraid to take a new approach in the interest of shareholders.
Consider efforts to make the Google segment more efficient — “a bit slimmed down” and with “greater focus,” as CEO Larry Page said in his 2015 restructuring memo.
And bigger-picture, Alphabet is taking a pragmatic and focused approach across the board.
“Alphabet is about businesses prospering through strong leaders and independence,” Page wrote in that same 2015 memo. That means no more willy-nilly spending on pet projects, but independent subsidiaries that need to prove their own value instead of just mooching off the search and advertising business forever.
This illustrates an increasing move toward responsible corporate management in recent years, starting perhaps as early as 2011 with the closure of Google Labs and the idea of putting “more wood behind fewer arrows.”
Throw in a respected new CFO in Ruth Porat, who helped initiate plans for a $5 billion stock repurchase program last year, and this isn’t the same Google that was wandering in the wilderness five years ago.
Making hard choices and significant changes in a company this size is no easy task, but Alphabet has done it anyway.
That’s perhaps the biggest reason of all to have confidence in the staying power of GOOG stock in the long-term.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
