In a few weeks, the Snapchat IPO will hit the markets, and it seems like a pretty good bet that there will be quite a bit of interest in the deal. But unless you are a mega-wealthy investor or manage a financial institution, you’ll likely not get any shares in the offering. Rather, you’ll have to buy SNAP in the after-market, when the valuation will probably be much higher.
So is it any wonder that IPOs can be a raw deal?
That may be true, but when it comes to investing in the big-growth opportunities, there really is no need to speculate in the IPO market. Hey, there are a variety of interesting stocks currently on the market that should be good enough.
Take a Look at GOOGL Stock
One to consider is actually Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG). Granted, the company is fairly mature, having been founded in 1998.
But what’s important about GOOGL stock is that the company has global brand, scale, infrastructure and massive user base to play in critical growth markets. Such factors are must-haves for getting the attention of sponsors, especially those that have massive budgets.
This is why a company like Twitter Inc (NYSE:TWTR) has struggled so much. In fact, in the latest quarter, the company’s revenues increased by a mere 0.9% on a year-over-year basis to $717.2 million, marking the 10th consecutive quarter of top-line deceleration. U.S. revenues fell by 4% to $440 million and of course, the company has yet to generate a profit on a GAAP basis.
All this happened even though there were major catalysts from the presidential election, NFL streaming and the holiday season.
By comparison, in the latest quarter Alphabet reported an impressive 22% jump in revenues to $26.1 billion and GAAP earnings of $5.33 billion, or $7.56 per share on GOOGL stock.
But this shouldn’t be much of a surprise. The fact is that GOOGL is positioned nicely for major growth categories like video (YouTube), mobile (Android, Google Play and Waze), devices (Pixel and Google Home) and cloud computing. All these represent multi-billion-dollar market opportunities — and should all provide nice long-term drivers for GOOGL stock.
Just look at Waze, which Alphabet Inc purchased for $1.3 billion back in October 2013. Interestingly enough, this price tag may have been a bargain! Note that GOOGL plans to launch a ride-hailing service — similar to Uber’s — in various cities in the U.S. that is based on the Waze platform.
By the way, back in 2013, the company also invested $258 million in Uber.
Although, when it comes to GOOGL stock, the real play is likely to be the impact from the company’s major investments in deep learning and AI (artificial intelligence). Let’s face it, Alphabet has a big-time advantage because of its experience in handling massive amounts of information with search.
Already GOOGL is introducing great AI products, such as its Assistant offering (the app allows for sophisticated natural language conversations). But the company has also included more than 350 AI features across many of the company’s other products during 2016.
According to Alphabet Inc CEO Sundar Pichai: “As I’ve shared before, computing is moving from a mobile-first to AI-first with more universal ambient and intelligent computing that you can interact with naturally, all made smarter by the progress we are making with machine learning.”
More importantly, GOOGL stock is currently trading at an attractive valuation. Consider that the forward price-to-earnings ratio is roughly 22X. Although, if you strip out the $86 billion in the bank, the multiple is 19. And this is roughly in line with Wall Street’s 19% five-year forecasted growth rate.
OK, then what about Snap? True, growth is ramping at a rapid pace. But then again, the company has only recently begun to monetize its user base, so it does not take much to generate huge spikes.
Yet it appears that — based on estimates from Goldman Sachs Group Inc (NYSE:GS) — Snap will churn out roughly $2 billion in revenues in 2018. But this will still mean that the company will trade at over 10 times revenues on a two-year forward basis. As for GOOGL stock, it is currently at a price-to-sales multiple of 6.4X.
So again, if you don’t get shares of Snap (and you probably won’t — at least the at the offering price), then it’s no big deal. Buying GOOGL stock should be just fine.
Tom Taulli runs the InvestorPlace blog IPO Playbook and also has his own free iOS app to estimate your tax refund, which is at PathwayTax.com. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
