A few weeks ago, I touched on the so-called “FANG” stocks. The acronym covers popular stocks like Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX) and Alphabet Inc (NASDAQ:GOOGL) — formerly Google, making up the “G.” But after delving into that from 10,000 feet, I wanted to jump specifically into GOOGL stock.
I was very upbeat about Alphabet in the assessment. Despite the optimism, though, we suggested waiting for a pullback. In fact, our very words were:
“At just a hair under all-time highs, now may not be the best time to buy. A retest of its 50-day moving average near $840 and a further decline to its 200-day moving average near $800 would offer better entry opportunities.”
So with GOOGL stock stumbling of late, where does it leave us?
According to the charts, right where we wanted.
Alphabet’s Issues
Alphabet’s YouTube ran some controversial ads. Running alongside them, though, included ads from McDonald’s Corporation (NYSE:MCD), AT&T Inc. (NYSE:T), Johnson & Johnson (NYSE:JNJ) and others. As a result, many of these brands have pulled or suspended their advertisements with the search and video giant. That sounds like bad news, and at least temporarily, it is.
The news pushed Alphabet stock below its 50-day moving average for the first time since late-December. However, my first thought was immediately that if one didn’t want to buy the stock immediately after the breach of the 50-day MA, they could wait until it hit the 100- or 200-day moving averages, or safer still, wait for a bounce.
That’s just what we’ve gotten.
GOOGL stock has since rebounded off the 100-day and is now challenging its 50-day moving average. A breakthrough here would mean enormous things for the stock, including a push toward all-time highs.
We took a look at Alphabet’s technical aspects, but what about its fundamentals?
What Makes GOOGL Stock Look So Good?
When we sorted through the FANG stocks, Alphabet was our favorite in regards to fundamentals.
First, consider its brand. There is no question who is the undisputed leader in search. There’s a reason people don’t say, “I don’t know, Bing it.” Or “who knows, just Ask Jeeves.” Google is the king of search and until the internet dies, it’s unlikely GOOGL will either.
In fact, Alphabet’s Google site is the most visited website in the world. Interestingly enough, its YouTube property is ranked second. Even Google.co.in — the Google used in India — is ranked seventh in the world.
Alphabet has a grip so strong it’s unlikely it will ever be broken. For a long-term shareholder in GOOGL, that’s money in the bank.
As the quarters and years go by, Alphabet’s core businesses will continue to line investors’ pockets. Its consistency is attractive, but other bets look promising too.
For better or for worse, Alphabet takes some chances known as “moonshots.” Take for instance, the company’s self-driving car business. Alphabet’s been at this one for a long time. Renamed Waymo, the unit has been making breakthroughs, which is very promising in this suddenly strong growth market. Without moonshots, Waymo would have never been created. It’s what makes Google, Google.
However, these moonshots can be bad news when they don’t pan out and cost too much money. The minds that started Google changed the internet forever. And while they’re excellent product people, they didn’t make for the best financial overseers.
Bring in CFO Ruth Porat, and that changes. Porat left Morgan Stanley (NYSE:MS) and joined Alphabet in May 2015. The stock, stagnant for a year, boomed 50% in the 18 months following her hire.
Streaky earnings results were replaced with consistent beats. She tightened budgets in a way that curbed careless spending yet still gave teams the flexibility they needed. Alphabet now has better transparency with the Street as well as a share buyback.
The Bottom Line for Alphabet
Perhaps the best part of GOOGL stock is the valuation. While not cheap necessarily, the valuation is reasonable. Trading with a forward price-to-earnings ratio of 21, Alphabet is forecast to grow earnings 19.3% annually for the next five years.
Throw in expectations for ~18% and ~15.5% respective sales growth for this year and next, and Alphabet becomes even more attractive.
With a stellar brand, reasonable current valuation, long-term growth and strong management, GOOGL is poised for success well into the future.
Luckily, investors now have a chance to buy.
Bret Kenwell is the manager and author of Future Blue Chips. He can be contacted on Twitter via @BretKenwell. As of this writing, Bret Kenwell held no positions in any security mentioned.
