Alphabet Inc (NASDAQ:GOOGL,NASDAQ:GOOG) has been on a tear this year, with the shares up about 18% to $939.54. Yet other online operators have done even better: Facebook Inc (NASDAQ:FB) is up 32% and Amazon.com, Inc. (NASDAQ:AMZN) has gained 25%.
So what’s going on here? Well, there have been some legitimate issues. One has been the scandal regarding offensive YouTube ads. The result has been a backlash from many top brands like PepsiCo, Inc. (NYSE:PEP), Wal-Mart Stores Inc (NYSE:WMT) and AT&T Inc. (NYSE:T).
And another nagging issue is that the core search engine business may be vulnerable. Let’s face it, the industry has been around for quite a long time. What’s more, users spend much of their time on social networks like FB.
Yet despite all this, the fact remains that GOOGL continues to churn out the growth. In the latest quarter, the company’s revenues shot up by 22% to $24.75 billion and earnings jumped by 28% to $7.73 per share. Wall Street was looking for $24.22 billion on the top line and profits of $7.39 per share.
Not bad for a company that is almost 20 years old. I actually think there is more upside for investors — so let’s go over some of the catalysts:
GOOGL Stock Reason #1: Moat
Success in the online world requires massive scale. This is especially the case for ad-based business models, since the rates can be relatively low. But with Google, the company has a well-developed ad system that makes the process much more efficient. It also helps that its set of assets have more than 1 billion users, such as Search, Android, Maps, Chrome, YouTube, Google Play and Gmail.
No doubt, it would be incredibly difficult, expensive and time-consuming to replicate this. As a result, GOOGL is in the prime position to capture an outsized chunk of the online ad market.
GOOGL Stock Reason #2: Other Bets
The “Other Bets” division posted a loss of $855 million during the prior quarter. And this is a good thing. Early-stage innovations require experimentation, which means there will be mistakes and misfires.
But of course, some of the efforts will ultimately prove to be game-changers, helping to propel the long-term growth for GOOGL stock.
This is how Larry Page and Sergey Brin put it in the 2004 S-1:
“We will not shy away from high-risk, high-reward projects because of short term earnings pressure. Some of our past bets have gone extraordinarily well, and others have not. Because we recognize the pursuit of such projects as the key to our long term success, we will continue to seek them out.”
Interestingly, perhaps one of the key parts of the Other Bets segment is the breakthroughs with artificial intelligence (AI ). Consider that the current CEO of Google — Sundar Pichai — believes that the firm is being transformed into an AI-first company.
In other words, GOOGL is implementing this powerful technology across the product lines — to enhance the capabilities, which will further the competitive advantages.
GOOGL Stock Reason #3: Valuation
Even with the recent run-up, GOOGL stock is still trading at a reasonable valuation, with the price-to-earnings ratio at 31X.
By comparison, FB is 44X. Interestingly enough, Microsoft Corporation (NASDAQ:MSFT) trades at roughly the same multiple of GOOGL stock even though the company is growing at a much slower pace!
And yes, various Wall Street analysts still see upside. For example, Credit Suisse’s Stephen Ju set a price target on GOOGL at $1,100 (this implies a potential 17% return).
He points to the multiple revenue drivers — such as YouTube, Search, Play and cloud computing — and concludes that “GOOGL shares in our view continue to exhibit the best risk/reward among the large cap Internet stocks.”
Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
