Alphabet Inc (GOOG) Stock Is No Moonshot

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Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) is the parent company of Google, the undisputed leader of online search and digital advertising. Its dominance hasn’t gone unnoticed by investors, who have bid the shares up towards their all-time highs.

Alphabet Inc (GOOG) Stock Is No Moonshot

Yet Google is no moonshot, which is the term it has used to describe the venture capital activities in its “Other Bets” segment. This includes self-driving cars and its Nest franchise, which actually has some sales and helps consumers more efficiently heat and cool their homes.

The question for investors going forward is if Alphabet can continue to dominate online advertising. It and Facebook Inc (NASDAQ:FB) controlled 50% of the $60 billion online ad market in 2015. Google controlled half of the market, or $30 billion. Facebook’s take was $8 billion, but is also growing rapidly.

GOOG Stock Isn’t Stopping

Alphabet’s sales growth has been meteoric. It is projected to report sales of nearly $90 billion for all of 2016 (the final year results have yet to be fully reported) and that should jump to above $100 billion this year (calendar 2017). That will mark a roughly 10-fold increase from the $10.6 billion it reported in 2006.

Extrapolating those figures out another decade, Alphabet stands a chance at generating over $1 trillion in revenue. That is certainly a tall order, but the network effect (where a product or service grows more valuable as more people use it) is proving to be one of the greatest growth drivers capitalism has ever seen.

Of course, there is a downside to such dominance. The European Union has been attacking Google, alleging it is abusing its dominant position to block out competition and keep internet surfers dependent on its services. Specifically, it has suggested that Google pushes hard to make its search engine the default on smart phones and computers. It’s not always easy being on top.

The worries over Google’s dominance echo the control Microsoft Corporation (NASDAQ:MSFT) held over personal computers back in the 1990s. In similar fashion, the U.S. Justice Department accused Microsoft of using its personal computing software dominance to push its Internet Explorer internet browser, which helped end the Netscape browser era that helped pioneer online search and browsing the world wide web.

Google’s dominance won’t last forever, but there is little reason to see it going away any time soon. In the next two years, analysts see earnings growing at a mid-teens percentage rate to above $41 per share for all of this year. It is a huge beneficiary of the growth in everything digital as consumers increasingly shop and socialize online.

Based off the current stock price of $803 per share, the forward price-to-earnings multiple of GOOG stock is below 20, or right about the market multiple. That is a very reasonable multiple for one of the best large-cap growth stories in the market today. Facebook is also compelling, but represents a higher growth candidate with higher risk — due mostly to its higher valuation.

I recently detailed that I think Microsoft isn’t growing fast enough to justify where the stock is trading at currently. Apple Inc. (NASDAQ:AAPL) represents an interesting story among large technology companies, but is much more tied to its iPhone and related hardware, which is growing more slowly and becoming more of a commodity as competitors copy its revolutionary smart phone product and apps that consumers download.

In another sign of Google’s dominance, it recently was reported that the Google Android operating system was used in nine out of 10 smart phones being sold. Its market share of the smart phone market was pegged at 87.5%, far exceeding Apple’s iOS operating system. Consumers are increasingly using their smart phones to access the web.

Google has specialized in releasing appealing products and services that help drive use of its search engines and drive advertising revenue. The offerings include Android, Google Maps, Google search, voice recognition on its phones, and a new Pixel phone that has received decent reviews.

Bottom Line on GOOG

There will likely come a time when the market grows concerned with either Google’s dominance, or starts to worry about slowing growth. Significant EU fines or allegations could also send the share price off recent highs. But at this point, any dip in the stock price represents a buying opportunity.

The share price is also a reasonable value given the growth prospects. Cash flow generation is great, and there is a good chance that management starts paying a dividend at some point in the future.

There is also the potential that a moonshot investment revolutionizes a market. Self-driving cars is certainly a candidate, and Google’s initial interest with the technology has helped drive innovation in the space.

As of this writing, Ryan Fuhrmann was long shares of Facebook, but did not hold a position in any of the other aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2017/01/alphabet-inc-goog-stock-googl-moonshot/.

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