Why Alphabet Inc Stock Is a Sure Bet

Alphabet's Other Bets are looking better and better

By Luce Emerson, InvestorPlace Contributor

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At the end of the day, seasoned investors know that investing in markets has a large element of gambling to it. Despite all the research, whether top down or bottom up, markets have that element of chance that looms large. But as far as bets go, Alphabet Inc (NASDAQ:GOOGL,NASDAQ:GOOG) feels as close to a sure thing as one can get.

Why Alphabet Inc (GOOGL) Stock Is a Sure BetThe third quarter demonstrated that GOOGL isn’t having trouble sustaining high double-digit growth rates. Revenues were up 24% year-over-year and operating margins improved by 200 basis points as well.

GOOGL’s Other Bets

Other Bets revenues, in particular, was very positive. The segment delivered 53% year-over-year growth and, while the total amount for the quarter was a tiny $302 million in comparison to advertising revenues of over $24 billion, it is on the rise. Investments that fall under the umbrella of Other Bets may take longer to monetize, but I have long held that the potential for coming up with another disruptive business lies in this segment.

Businesses that are included in Other Bets include Access, Calico, CapitalG, GV, Nest, and Waymo — though the majority of revenues come from Google Fiber, Nest products and services, and licensing/R&D services through Verily.

Specifically, Waymo seems to be on the precipice of becoming a leader in the autonomous vehicle industry, which may surprise some given that GOOGL is not an automotive company. However, because of GOOGL’s technological edge, they have been able implement the software and hardware changes necessary to make this a reality, while traditional auto makers are more focused on energy efficiency.

GOOGL has been working on this technological breakthrough since 2009, and indications are that they have the lead with early riders already on the road.

To be sure, I’m not casting a blind eye at the fact that the operating loss for Other Bets is still running high at over $800 million, but, directionally, things are looking bright. That loss is diminishing year-over-year. And capital expenditure (capex) is tapering off as well — $324 million for the same period last year compared with $77 million this quarter.

Certainly, not all of the investments will prove groundbreaking, just as not all venture capital investments are multi-baggers, even by the most highly regarded firms. But it seems that certain projects are working out — and that is a trend to keep an eye on.

GOOGL Ad Metrics

Advertising remains the crux of GOOGL’s revenue stream, so it’s important to monitor not only the year-over-year growth but also the quarter-over-quarter growth of that endeavor. Numbers look impressive — growth on all fronts, at least on a quarter-over-quarter basis.

Aggregate paid clicks are up 47% YOY and 6% QoQ, paid clicks on GOOG properties increased 55% YOY and 7% QoQ, and paid clicks on GOOG network properties increased 10% YOY and 2% QoQ. So, in summary, supercharged growth from a YOY perspective and more muted, but very respectable, mid-single-digit QoQ numbers. Nothing for investors to complain about on this front.

The core business shows that GOOG continues to benefit from powerful network effects, creating a very attractive moat for GOOG’s search and advertising business.

Bottom Line on GOOGL Stock

Things are going so well at GOOGL, there’s seemingly little to report on. Alphabet is a fine-tuned machine and the search business just keeps on humming along, generating ever-increasing amounts of revenue. Earnings, in turn, also continue to rise, keeping valuation reasonable even as share prices increase.

What I will point out is that, at current valuations, the potential for even one of the Other Bets businesses to break out into something huge is not factored in. So investors are getting a moat-like search engine and ad business for 35 times trailing earnings and Waymo and Nest for practically nothing.

From that angle, GOOGL looks mighty attractive.

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


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/alphabet-inc-googl-sure-bet/.

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