By now, everyone knows what FANG is. Jim Cramer coined the term several years back. Its an acronym that represents the big four hyper-growth tech names: Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX), and Alphabet Inc (NASDAQ:GOOGL). For now, GOOGL stock doesn’t get the credit it deserves.
Times have changed some since Cramer coined the term.
The era of AI and cloud computing has rushed to the forefront. That has led investors to think there should be another “N” in FANG for NVIDIA Corporation (NASDAQ:NVDA). Chinese interest stocks have also taken off as China’s middle class has urbanized. Consequently, many investors also think names like Alibaba Group Holding Ltd (NYSE:BABA) should be in the same discussion as FANG stocks.
Overall, though, the idea of FANG remains unchanged. There is a select group of super-growth stocks which appropriately deserve a premium valuation because of their leading innovation, robust growth potential, and exposure to secular growth markets.
But one of these super-growth stocks feels underappreciated right now.
Which one? GOOGL stock.
The GOOGL Growth Story Is Underappreciated
Hyper-growth tech stocks have been big winners so far in 2017. AMZN is up 30%. FB and NFLX are each up 50%. NVDA is up more than 75%. BABA has more than doubled.
But GOOGL? It’s up only 18%.
And it’s actually down almost 3% over the past 3 months.
There was a big $2.7 billion antitrust fine from the European Union which clouded last quarter’s numbers. There is also a bunch of negative publicity on the company due to multiple pay discrimination suits. Investors are also concerned that the Pixel 2 smartphone won’t sell that well because it’s competing against big time launches from Apple Inc. (NASDAQ:AAPL).
Recent quarterly results also brought margin concerns to the forefront. In Google’s ad business, traffic acquisition costs spiked and cost per click fell. Both of those dynamics have to do with the shift to mobile. 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.
So margin compression is a concern.
But management said on the conference call that they are “focused on revenue and operating income dollar growth and not on operating margins.” After all, despite margin compression, operating income still rose about 15% year-over-year due to robust revenue growth.
That is exactly where investors’ attention should be – on GOOGL’s robust top line growth, which is powering robust profit growth despite margin compression.
YouTube is on fire because it is the centerpiece of mobile video. That is why viewers watch on average 60 minutes a day on their phones and tablets. Google Home is the revenue leader in the voice assistant market, a market with huge growth potential as the Internet-of-Things (IoT) space scales. Google Cloud is getting more big-time deals now than ever. Android continues to be the global leader, with 88% market share (up from 86% last year).
All in all, there are a whole bunch of growth levers at GOOGL. But the market seems to be under-appreciating those growth levers.
Bottom Line on GOOGL Stock
GOOGL stock trades around 23.3-times next year’s consensus earnings estimate.
That is about as low of a forward price-to-earnings multiple as you will find among hyper-growth tech stocks. FB stock trades at 26.3-times next year’s consensus earnings estimate. BABA (27-times), NVDA (47.5-times), NFLX (91.5-times), and AMZN (122.3-times) all trade at significantly higher valuations.
And it’s not like this low valuation is a result of low growth. Over the next 5 years, GOOGL is expected to grow earnings by nearly 20% per year. A 23.3-times fiscal 2018 earnings multiple on 20% earnings growth gives the stock a pretty good price-to-earnings/growth (PEG) profile of just under 1.2.
By comparison, the S&P 500 is trading at 17-times fiscal 2018 earnings for growth of around 11%. That is a PEG profile of about 1.5.
So that is how I look at GOOGL stock.
It’s the least expensive of the hyper-growth tech stocks. But it’s still a play on secular growth trends such as the digital advertising boom, an acceleration in smart home adoption, the mass adoption of AI technologies, and the continued ramp of cloud computing.
GOOGL stock is also more attractively valued than the market by a long shot.
So why not buy GOOGL stock?
It’s big growth at a pretty big discount.
As of this writing, Luke Lango was long GOOGL, NVDA, FB, AMZN, and BABA.