Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) has come upon tough times recently. It was a $1,000 stock back in late July. Now, GOOGL stock trades at $952.
But Google’s ad business continues to grow at a healthy pace. YouTube is still on fire. Google Home is a revenue leader in a secular growth market. Google Cloud is scaling nicely. Android has extended its dominance in the mobile space. Highly anticipated Google Lens is set to launch later this year.
Meanwhile, of the FANG stocks, GOOGL stock trades at the lowest forward price-to-earnings multiple.
So, with GOOGL, investors are looking at a depressed stock with a still strong fundamental backdrop and a relatively cheap valuation.
Is this an opportunity to buy the dip?
I think so.
GOOGL Has Struggled, And So Has Everyone Else
The 4% decline in GOOGL stock from its July highs isn’t good, but it’s also not unusual.
Political uncertainty has weighed on market sentiment recently. And when market sentiment falls, it’s usually the richly valued stock market beauties that lead the laggards.
Amazon.com, Inc. (NASDAQ:AMZN) dropped about 5% over the past month. Netflix, Inc. (NASDAQ:NFLX) fell almost 6%. All in all, the NASDAQ 100 is roughly flat.
The recent weakness in the tech sector is a natural pullback in a long-term bull run. The NASDAQ 100 is up 22% year-to-date and 45% over the past three years. GOOGL is up 19% year-to-date and 62% over the past three years. NFLX is up 41% year-to-date and 156% over the past three years. And AMZN is up 29% year-to-date and 185% over the past three years.
Let these stocks take a little a breather. They need to pull back and consolidate before taking another leg higher.
And why will they eventually resume their upward trajectories? Because the growth stories remain strong and the valuations remain reasonable.
This is especially true for Alphabet.
The Alphabet Growth Story Is Still Strong
The Alphabet growth story was unfortunately clouded last quarter by a $2.7 billion European Union antitrust fine. But beyond that noise, the Alphabet growth story continued to show strength today while implying strength for many quarters to come.
There were some concerns in Google’s ad business as traffic acquisition costs spiked and cost per click fell. Both of those dynamics have to do with the shift to mobile, and will likely continue as Alphabet’s mobile advertising business scales. Simply, mobile search carries higher acquisition costs and lower cost per click because consumers don’t click on as many as ads on their phone as they do on their desktop.
Consequently, operating margins got squeezed. But that is where the bad news ends. Despite operating margin compression, operating income still rose about 15% year-over-year due to robust revenue growth.
This will be the new theme for Alphabet. Management said on the conference call that they are “focused on revenue and operating income dollar growth and not on operating margins.”
And that should be totally fine with investors. The topline growth story is so strong that it will inevitably flow through to robust operating and net profit growth, even with some margin compression.
YouTube is on fire. It really is the centerpiece of mobile video. Not only does the platform have 1.5 billion monthly viewers, but those viewers watch on average 60 minutes a day on their phones and tablets.
Meanwhile, Google Home is the revenue leader in the voice assistant market, and this market has lots of room to grow. About half of U.S. consumers don’t use voice assistants. Meanwhile, of those who do, 37% report sub-par experiences. Clearly, there is room for voice assistants to both improve and gain more users.
Google Cloud is scaling nicely. Last quarter, Alphabet closed three times as many large cloud deals (those greater than $500,000) than they did last year. On the smartphone side, research firm Gartner estimates that Android controlled 88% of the smartphone shipment market in the second quarter of 2017, up from 86% in the second quarter of 2016. And last but not least, the quite cool Google Lens product is set to launch later this year.
Bottom Line on GOOGL Stock
The growth story is firing on all cylinders. Meanwhile, GOOGL stock trades at 23.8 times fiscal 2018 estimates, the lowest fiscal 2018 earnings multiple in the whole FANG group.
With mitigated valuation risk but still tons of growth exposure, GOOGL looks like a great “buy the dip” stock here.
As of this writing, Luke Lango was long AMZN, NFLX, and GOOG.
