It was an awful third quarter for the stock market … but not for Google!
Google shares surged more than 18% since the start of July. Of course, GOOGL stock did get hit by some of the broader market volatility. Google finished the third quarter down about 12% from the all-time high it hit in July. So it’s technically in a correction just like the S&P 500.
But let’s not nitpick here. Google should continue to reward shareholders over the long haul.
The company reported strong earnings in July, reassuring investors who had started to worry that the company’s best days are behind it. Profits blew away forecasts, led by healthy growth at YouTube and Google’s growing mobile ad operations.
Earnings for the third quarter should be solid as well. Analysts are predicting an increase of more than 15% per share.
But the real story for Google in the third quarter was the unveiling of its new Alphabet organizational structure.
Alphabet Offers Clarity, New Opportunity for GOOGL
The business we now know as Google will soon become a subsidiary of Alphabet. The Alphabet parent company will be led by Google CEO Larry Page, co-founder Sergei Brin, chairman Eric Schmidt and CFO Ruth Porat.
But Alphabet will break out the results of some of the company’s more unconventional businesses, such as its Fiber and Nest businesses as well as Life Sciences and Calico health technology units.
“Old” Google will continue to generate the majority of Alphabet’s revenue and profits. But it will now be freed up from some of the more pie-in-the-sky initiatives that are near and dear to the hearts of both Page and Brin.
Sundai Pichar, the widely respected head of Google’s Android division, will become the CEO of Google. So he’ll now have all the people working on Android, YouTube, Chrome, Google’s many apps and maps — and of course, search — reporting to him.
Yes, this all is a bit of an odd move. How many blue-chip companies out there give birth to a new parent? But if any company can pull this off, it’s Google.
Having more transparency at Google is smart. It, in theory, will make Google easier to understand. Pichar can focus on Android’s battle with Apple and ways to gain more ground in mobile advertising in order to keep rival Facebook at bay. Page and Brin can take their time working on things like driverless cars and drones.
The Alphabet structure could also give Porat license to do more deals. She’s an investment banker after all, formerly serving as CFO of Morgan Stanley.
Think about it. If Google wanted to buy another connected device/Internet of Things company, it could do so via the Nest part of Alphabet. Profits and losses related to the deal would show up in the Nest results, not the bigger Google.
Sure, you could argue that this makes it even more obvious that Page, Brin and Schmidt call all the shots and can do whatever they want. That’s true. They own almost all the voting stock.
But hasn’t this triumvirate earned your trust? Anyone who’s owned Google since its 2004 IPO has little to complain about. And the stock, while not dirt cheap, is still trading at a reasonable valuation of 18 times 2016 earnings estimates.
So whether or not you call it Google or Alphabet, one thing is clear. It’s a great company … and still one of the best stocks for 2015.
As of this writing, Paul R. La Monica did not hold a position in any of the aforementioned securities.
