Disruption is everywhere. Amazon.com, Inc. (NASDAQ:AMZN) disrupts how we shop, while Airbnb disrupts where we stay. Tesla Motors Inc (NASDAQ:TSLA) disrupts what we drive, and Uber even disrupts whether we drive. If a teen with 2 million Instagram followers can disrupt how billion-dollar businesses find customers, the rest of us need to dive in and start swimming … or at least buy the one stock which has its hands in all of the above: Alphabet Inc (NASDAQ:GOOGL).
Simply put, GOOGL stock is the most innovative, most disruptive and cheapest $800 equity I know.
Let me explain.
Silicon Valley money manager Michael Moe and his team at GSV Asset Management produce a provocative weekly newsletter dedicated to highlighting where they think the world is going. While doing research for my Bullseye Brief, one of their recent pieces got me thinking about innovation in more tangible terms. The team ranked eight global technology companies based on their involvement across 22 cutting-edge categories. Hands down, Alphabet ranks No. 1, capturing 21 of 22.
Curiously, all eight GSV-highlighted companies have dedicated efforts in the areas of artificial intelligence, big data and cloud services, making these three the Holy Grail of innovation.
The first two come as no surprise, as data gathering and analysis are critical to predicting behavior, enabling companies to target consumers accordingly. Web services, which is now the fastest-growing segment for Amazon, is less obvious but nonetheless a clear indicator these innovators want to get bigger by serving as the backbone for other companies.
This is key, and since Google already commands 49% of the global online advertising market according to Pivotal Research analyst Brian Wieser, I’ll bet on GOOGL.
Much of Google’s innovative efforts happen at its off-site research center called Google X, aka the Moonshot Factory. It’s run by a futurist named Astro Teller, and I highly recommend his TED Talk explaining how Google X approaches innovation:
- Identify a problem affecting millions of people.
- Find or propose a radical solution for solving that problem.
- Move full speed ahead if there’s reason to believe technology for such a radical solution could actually be built.
He says Google X people spend most of their time “breaking things and trying to prove they’re wrong” but believes that’s their secret … what makes Googlers different. By “killing” more projects than they approve, their success rate rises. Alphabet spent $13.8 billion last year on research and development — the second highest number of any company in the world behind Amazon, and second highest as a percentage of sales among the eight innovation leaders.
R&D as % of Revenue
Alphabet invests a staggering amount of money to fund R&D, both because it can and because it has to. With three times more online advertising than its next closest competitor, GOOGL is a cash cow.
By the same token, it has significant overlap with all seven competitors in the most obvious categories — like robotics and AI– and each of these companies is hungry to dominate.
There’s no letting up in this crowd. Innovate or die.
What’s GOOGL Stock Worth?
Ultimately, the question is value: What do we pay?
I like to compare the growth we’re getting (earnings) with the price we’re paying (price-to-earnings, or P/E). This is called a price/earnings-to-growth ratio (PEG), and it’s an intuitive way to compare apples to apples.
Using 2017 consensus estimates tracked by Bloomberg, GOOGL stock is tucked right in the middle of the pack. Its PEG ratio is 1.08. PEGs below 1 are cheap, and PEGs approaching 2 are expensive.
PEG ratios are revealing.
First of all, no one should buy Microsoft Corporation (NASDAQ:MSFT). It’s neither a growth stock nor a value play.
Alibaba Group Holding Ltd (NYSE:BABA) is a tad expensive, but not excessively so, especially since many consider it the Chinese consumer trading vehicle.
Samsung (OTCMKTS:SSNLF), I admit is a mystery. It’s so cheap. I can only surmise its limited German and S. Korean listings deter U.S. investors, as does the $1,700 stock price. It needs to split at least 10-to-1.
Sell the GOOGL April $800 puts at $20 to initiate a long-biased position.
If the stock pulls back and trades through the $800 strike price, I’m assigned shares and become a buyer. If Google continues making new highs, I pocket the premium. I am content either way. Google’s chart indicates initial technical support around $780, and significant long-term support $700-$725.
The reason I’m selling puts rather than buying the stock is because GOOGL stock has recently risen to a new all-time high. I know new highs tend to beget new highs (momentum traders buy strength), but I’m a value buyer at heart.
Adam Johnson is Founder and Author of Bullseye Brief, an investment newsletter that presents thematic and actionable ideas. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @AJInsight.