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Buy Alphabet Inc (GOOGL) Stock on the Next Pullback

Despite likely lackluster third quarter earnings, GOOGL's future looks bright

Tech behemoth Alphabet Inc (NASDAQ:GOOGL) is certainly the most underappreciated of the FANGs, but that doesn’t mean it’s not a solid pick. The stock has been a reliable performer over the past five years, and thanks to its impressive dominance in the search engine space, the company is likely to continue delivering over the next five years.At $985 per share, Google stock is trading at 32 times its forward earnings, so it’s not cheap. However, I believe we’ll see a GOOGL stock pullback toward the end of the month when the firm releases its third quarter results. Worries surrounding Google’s earnings report would provide a good entry point for long-term investors, because while the firm is presently facing some challenges, the future looks bright for Google stock in the longer term.

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At $985 per share, Google stock is trading at 32 times its forward earnings, so it’s not cheap. However, I believe we’ll see a GOOGL stock pullback toward the end of the month when the firm releases its third-quarter results.

Worries surrounding Google’s earnings report would provide a good entry point for long-term investors, because while the firm is presently facing some challenges, the future looks bright for Google stock in the longer term.

GOOGL Earnings Disappointment

The reason I’m cautious about Google’s upcoming earnings report is Google CFO Ruth Porat’s warning during the firm’s second quarter earnings call. She stressed the fact that cost pressures were continuing to weigh on Google noting that, “Headcount additions tend to be seasonally high in Q3, because that is when we bring on new graduates. In addition, please keep in mind that our marketing costs are typically weighted more heavily toward the back half of the year due to the holiday season…”

She went on to say that the company’s move into hardware would also require more spending on promotional activities, something that could hurt GOOGL stock following the earnings call.

Hardware Bets

I have mixed feelings about Google’s increased focus on hardware because it’s such a difficult space to excel in. However, currently Google is relying heavily on Samsung to carry its Android operating system, and without more of its own devices on the market, Google is falling behind advertising competitors like Amazon.com, Inc. (NASDAQ:AMZN).

One thing I love about Google’s new hardware offerings, which include a mobile phone and smart speakers, is that they are fully loaded with the firm’s most recent artificial intelligence technology. While hardware can be a thankless business (low margins, rapidly changing landscape), AI is a little more enticing.

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AI Future

Artificial intelligence and machine learning are still a relatively new frontier, and everyone who’s anyone is working to develop this technology and get it out to market. Google’s devices boast impressive capabilities like being able to differentiate between users based on their voices, and building profiles around those voices to offer music recommendations based on preferences. The firm also debuted a pair of headphones that can translate conversations between two people speaking different languages.

It remains to be seen exactly how AI will play on the retail market, but as companies like Apple Inc. (NASDAQ:AAPL) and Amazon rush to create the most functional personal assistant, it appears to be becoming a relatively large market. Not only does AI appeal to the public by making devices smarter, but it will also help Google’s search engine business. At the unveiling of the new hardware, Google CEO Sundar Pichai highlighted how AI has been able to take the company’s image-recognition capabilities to the next level.

Other Bets

Growth investors often choose GOOGL because of the company’s “moonshots.” Alphabet has an entire arm of its business dedicated to aggressive investment in risky projects that have the potential to become game changers in a variety of industries. The firm has been working on everything from glucose-monitoring contacts to cutlery that helps to stabilize hand tremors, but what people are most excited about is Waymo, Alphabet’s driverless car company.

Reports out last week suggest that Waymo is nearly ready to start testing its vehicles on Phoenix roads sans driver. Of course, there’s still a big question mark as far as safety and regulation, but if the rumors are to be believed, Google appears to be head and shoulders above the rest in creating the world’s first fully driverless car.

Google’s Bottom Line

Google has certainly carved out its place in the future by aggressively pursuing new technology, making it a great choice for long-term investors. Not only that, but GOOGL stock is relatively safe to hold considering that the majority of the firm’s revenue comes from advertising on its search site and YouTube. GOOGL’s share of search ad revenue in the U.S. is seen growing to 80% in 2018, and the firm is believed to control over 90% of that market worldwide. That’s a pretty wide competitive moat, which makes GOOGL stock a relatively safe bet.

I am expecting to see Alphabet shares pull back at the end of October because of concerns regarding the firm’s third quarter results, so I’d keep an eye on GOOGL stock and pick it up as soon as the share price dips.

As of this writing, Laura Hoy was long AMZN.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/buy-alphabet-inc-googl-stock-on-the-next-pullback/.

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