Why Smart Money Likes Alphabet Inc (GOOGL) Stock More Than Facebook

GOOGL stock holders have tons of reasons to feel confidence in the company's long-term plans

By Richard Saintvilus, InvestorPlace Contributor


If you ever want to know what the so-called “smart money” is buying and selling, the 13F filing with the Securities and Exchange Commission can be your best friend. And it would seem, among the large-cap companies, and specifically the FANGs, Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) stock is now the preferred holding among hedge funds.

Why Smart Money Likes Alphabet Inc (GOOGL) Stock More Than Facebook
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In a recent research note by Tobias Levkovich, analyst at Citi Research, the Google parent was the top choice of hedge fund managers for the second quarter, surpassing Facebook Inc (NASDAQ:FB). At the end of the first quarter, both tech giants were tied for No. 1, when thirteen funds held shares of both tech companies in their top ten.

How GOOGL Offers More Value Than FB

Levkovich polled hedge funds’ top-ten holdings and determined that sixteen hedge fund mangers said Alphabet was in their top-ten holdings, while fifteen had Facebook in their top ten positions. Obviously, the fact that both companies are separated by just one spot suggests they’re both loved. But from a valuation perspective, the fact that GOOGL stock has broken the tie could indicate that hedge funds see more value there.

And that’s tough to dispute.

GOOGL stock closed Friday at $926.18, down 0.16%. Although the shares are up 16% year-to-date, besting the 8% rise in the S&P 500 Index, the shares are also down 10% since reaching their all-time high of $1,008.61 on June 6. And if you’ve held the stock since the end of the second quarter ,you’re down about 3%.

By contrast, FB stock — up roughly 45% YTD — has risen more than 13% since the end of the second quarter and is down just 4% from its all-time high of $175.49.

In other words, given the significant outperformance in FB stock, the hedge funds are saying they now see more potential upside in GOOGL stock. I tend to agree. From a valuation perspective, Alphabet is still relatively cheap despite being priced at 23 times fiscal 2018 estimates of $40.05 per share. Not only does that assumes year-over-year earnings-per-share growth of almost 20%, the price-to-earnings ratio is one point lower than it was two months ago.

Alphabet Has Growth Levers to Pull

Plus, when factoring GOOGL’s war chest of around $95 billion and another $36 billion in operating cash flow, the stock should be owned, not traded. And from an operational perspective, few large-cap stocks offer the level of security as Alphabet, which not only has a monopoly in the search business (which accounted for more than 95% of in second-quarter revenue), but is also a part of a duopoly — with Facebook — in the realm of digital advertising.

Spending on digital advertising is projected to rise 18% in 2017 to $229.25 billion, up from $194.6 billion in 2016. This growth trend, which still seems conservative, bodes well for what GOOGL is able to do in the quarters and years ahead, especially when considering that the company’s dominant advertising business contributed to almost 90% of Google’s second-quarter revenue, versus just above 10% for the non-advertising segment.

Meanwhile, the company’s advances in cloud computing, where it competes with Amazon.com, Inc. (NASDAQ:AMZN) and Microsoft Corporation (NASDAQ:MSFT), continue to keep GOOGL relevant in high growth markets too. Combined with moonshots such as self-driving cars and artificial intelligence, where GOOGL is arguably the leader in those categories, gives it an inside track on ways to further monetize its search dominance.

What’s Ahead?

Looking ahead to the quarter that ends September, Alphabet is expected to earn $8.34 per share on revenue of $27.14 billion. This compares to the year-ago quarter when the company earned $9.06 per share on $22.45 billion in revenue. For the full year, ending in December, earnings are projected to be $30.60 per share, while revenue of $109.04 billion would rise 20% YOY.

Bottom Line for GOOGL Stock

Despite the expected YOY decline in fiscal 2017 EPS, GOOGL stock holders have tons of reasons to feel increased confidence about what the tech conglomerate will do in the years ahead. It’s for this reason hedge fund managers have actively bought the stock during the recent dip.

And I wouldn’t be surprised if Alphabet, which I consider a long-term play, reaches $1,100 by this time next year.

As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2017/08/smart-money-likes-alphabet-inc-googl-stock/.

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