Its been a great day on Wall Street for big tech. Two FANG stocks reported blowout earnings after the bell on Thursday. E-commerce leader Amazon.com, Inc. (NASDAQ:AMZN) beat on both top- and bottom-line expectations, while digital advertising leader Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) also reported a double beat quarter.
Both stocks are soaring in Friday trading.
Three of the FANG stocks have now reported earnings for this quarter. All three reports healthily smashed expectations. Consequently, the trend towards big-tech consolidation among the top four players seems to be intact. The “buy FANG” thesis seems to still be in vogue on Wall Street.
But one of these FANG stocks remains especially attractive considering its depressed valuation, even amidst all this excitement around tech. That stock is GOOG, which continues to trade at an attractive valuation considering the company’s robust growth prospects.
It Was A Really Good Quarter for GOOG Stock
Alphabet had a tremendous quarter.
On the revenue side, total revenues surged 24% higher. They were up 21% last quarter, 22% the quarter before that, and 20% one year ago.
There are two things to note here. One, this is a supposedly “mature” company that has been around for a while and is still posting revenue growth consistently above 20%. Two, the revenue growth narrative is actually accelerating. The 24% revenue growth rate this past quarter was the highest clip recorded so far this year.
The same is true for the advertising revenue growth rate, which stood at 21% versus a high-teens rate over the past two quarters. Google is simply flexing its dominance in the digital advertising world. Mobile search is on fire. So is YouTube, which has 1.5 billion users who on average spend 60 minutes per day watching YouTube videos.
The mobile and video shifts are still in their infancy, so both Google mobile and YouTube have long growth runways ahead.
Meanwhile, Google Cloud continues to gain market share. Google’s ability to leverage data analytics and machine learning in its cloud ecosystem is resulting in huge enterprise customer wins. Recently, the headline names that shifted to Google Cloud include Kohl’s Corporation (NYSE:KSS) and Paypal Holdings Inc (NASDAQ:PYPL).
New and expanded partnerships with Cisco Systems, Inc. (NASDAQ:CSCO), Marketo and VMWare, Inc. (NYSE:VMW) ensure that Google Cloud is not done innovating. This continued pipeline of innovation will couple with continued public cloud adoption to give the Google Cloud business another long runway for growth.
Then there is all the other cool stuff at Google that could one day transform into huge revenue streams.
Waymo continues to be the unheralded leader in the autonomous driving space. Testing is now expanding to Michigan, which will mark the sixth state Waymo has been tested in. This business has huge long-term potential as a driver-less Uber.
The largely under-hyped Pixel smartphone is a competent challenger to Apple Inc. (NASDAQ:AAPL) and has a new TV ad that is quite captivating. Nest is an interesting play in the smart home space that is quickly gaining traction.
Overall, the Google growth story is on fire.
Alphabet Remains Undervalued
Despite exposure to every secular growth market investors salivate over (digital advertising, autonomous driving, cloud, artificial intelligence, smart home, etc), GOOG stock still doesn’t command a premium valuation.
In fact, its trading at a far more attractive valuation than the market.
Even at $1,035, GOOG stock still only trades at 33.8 times fiscal 2017 earnings estimates. That is a pretty cheap multiple considering earnings growth over the next several years is pegged at essentially 24% per year. A 38 times multiple on 24% growth gives GOOG stock a price-to-earnings/growth (PEG) ratio of around 1.4.
Meanwhile, the S&P 500 is trading at 19.6-times 2017 earnings for multiyear growth of about 11% per year. That gives the market a PEG ratio of about 1.8.
Clearly, GOOG stock gives you a lot more bang for your buck. It remains undervalued in an era when its clear that tech is consolidating around four major players. Alphabet is one of those players, and consequently, a must-own stock given its reasonable valuation.
As of this writing, Luke Lango was long GOOG and AMZN.