Shares of Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) have been on fire this year, up 33% so far in 2017. However, GOOGL stock price may be heading even higher if shares are able to breakout over current levels. Let’s take a look at three reasons why now may be the time to buy Alphabet.
Business Is Good, From A to Z
For Alphabet, all is going well. The company is not growing as fast as Facebook Inc (NASDAQ:FB),which is setting up for its own breakout, but GOOGL is still growing. Last quarter it churned out almost 24% revenue growth, an impressive figure no doubt.
Digging deeper into that report, we see that advertising made up 87% of sales, flat from the previous quarter. However, year-over-year (YoY) advertising sales climbed 23%. The fourth quarter will likely be strong, given the strengthening economy and continued shift to e-commerce during the busy holiday season.
More broadly speaking, as with Amazon.com, Inc. (NASDAQ:AMZN), GOOGL will continue to be a big beneficiary of this shift to online shopping, as more consumers shop and research online.
Other businesses continue to do well, too. “Other bets” saw sales rise 53% YoY to $302 million, which came in well ahead of analysts’ expectations of $267 million. While operating losses of $812 million were large, this was a YoY decrease from $861 million.
I like Alphabet for a few reasons beyond search and advertising. Besides becoming a verb, “I don’t know, man, just Google it,” its YouTube and cloud units remain promising.
YouTube, behind Google, is the second most popular website in the world. Its new YouTube TV offering for $35 per month is a promising cord-cutting alternative.
However, unlike Netflix, Inc. (NASDAQ:NFLX) it’s not shelling out roughly $8 billion per year for its own content. Instead, it’s removing the middleman content provider, making it easier to access normal TV offerings.
Alongside its cloud business, which is a building block in future technology, Alphabet remains a diverse company with promising pockets of growth behind its big time money-maker.
Then There’s the Valuation
While the business may be good, the valuation has to be worth it. Thankfully for Alphabet, it is. GOOGL stock price trades with a rich price-to-earnings (P/E) ratio of 38. But that’s not entirely accurate, given the company’s switch to GAAP earnings and the fact it is based on past results.
Instead, GOOGL stock price trades with a forward P/E ratio of about 25. Given the company’s 22.3% sales growth this year and expectations for almost 20% sales growth in 2018, 25 times earnings doesn’t seem too expensive. More important, GOOGL is likely to generate earnings growth north of 20% annually for the foreseeable future.
When a company has a great business, as in the case of Alphabet, it tends to lead to great growth. When that business is managed properly, it leads to a great stock. For as great as Alphabet has been since inception and what a blockbuster Google search was, management remains key.
Adding CFO Ruth Porat was an important move, as the former Morgan Stanley (NYSE:MS) CFO has been brilliant. Keeping costs down without restricting growth has lit a spark in GOOGL stock price.
Shares are up more than 90% in the 30 months she’s been on the job. A coincidence? I think not.
Trading GOOGL Stock
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We’ve got a good business and solid valuation. So the third reason GOOGL stock price may be on the verge of a breakout? Shares are hovering right near the key level of $1,060.
After its late-October earnings report, GOOGL stock popped to $1,060 before retreating down to $1,035 in the same session. While still positive on the day, it gave investors pause for several sessions.
Another rally-and-fail to $1,060 took place in early November and we now find ourselves near this level again. If GOOGL stock is able to break over and close above $1,060 it is a buy. Investors who buy GOOGL on this move can use a close below this level as their stop-loss.
Should this breakout fail, investors could look to buy on a pullback to $1,010 to $1,020, at the 200-day moving average or near strong support at $920. The latter would likely require a market-wide correction, though. For now, let’s look to buy on a close over $1,060.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
