It has been a tough run for the tech sector lately. Usually the beauties of a bull market, tech stocks have suddenly fallen out of favor recently for more traditional investments. But they won’t stay down for long, so I’m buying Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) on this dip. GOOGL stock has long been the definition of big growth at a big discount.
Investors are hyper-focused on tax reform in the near-term, and that is causing a huge flow of money into traditional low-multiple, high-tax rate names. But the fundamentals on hyper-growth tech names remain strong. Valuations remain reasonable. The growth narratives are still only getting stronger.
Over the past week, Google’s growth story has strengthened, but the valuation has compressed. That means the current price, trading around $1,000, is bigger growth at a bigger discount. As attention slowly fades from tax reform back to growth, tech stocks will bounce back. I’m buying here.
The 3 Big Reasons to Buy Google
Previously, I outlined three big reasons to buy GOOGL stock. They are as follows:
- Digital advertising growth is accelerating thanks to consolidation of digital ad dollars among the biggest players.
- Google Cloud is set for market share gains thanks to Big Retail ditching AWS.
- Google is set to become a major player in the self-driving, ride-hailing market, which could add tens of billions of dollars (and likely more) to Google’s value.
Those three major growth drivers remain in place today.
Google’s advertising revenue growth rate is actually going up, an impressive feat for something growing above 20%. The driver behind this growth acceleration is digital ad dollar consolidation.
While Google and Facebook Inc (NASDAQ:FB) are growing massive ad revenue bases at stable growth rates, growth at Snap Inc (NYSE:SNAP) is rapidly decelerating while it is actually negative at Twitter Inc (NYSE:TWTR).
What is happening under the hood here is that advertisers at first experimented with all digital platforms as advertising channels, and then discovered that ROI on platforms that lack scale (like Snap and Twitter) was poor. ROI, meanwhile, on platforms with tremendous scale (like Google and Facebook) was much better.
Now, not only are ad dollars flowing en masse from traditional to digital mediums, but digital ad dollars are flowing en masse from smaller players to larger players. Alphabet wins in both of these transitions.
Meanwhile, Google Cloud continues benefit from robust growth. Specifically, Google’s position as a cloud provider that doesn’t compete on the retail front will provide long-running benefits. As Amazon grows its retail presence, more and more Big Retail players will choose Google Cloud over Amazon Web Services.
They don’t want to give money to the same company that is eroding their business. On the driverless car front, Google’s self-driving unit, Waymo, continues to extend its leadership in the market. Waymo has now racked up four million autonomously driven miles, clocking a million of them between May and November.
Clearly, growth at Waymo is only accelerating. This growth acceleration positions Waymo to be a major player in the self-driving, ride-hailing market. This isn’t a small market. Uber has amassed a $70 billion valuation and Lyft has earned an $11 billion valuation by being the leading players in this market.
If Waymo does successfully become a major player in this space, that could add tens of billions of dollars (and likely more) to GOOGL’s value.
More Reasonsn to Buy GOOGL Stock
Beyond these three main reasons, there are also other reasons to buy GOOGL stock that have surfaced over the past month.
The company is ramping up its fight against inappropriate content, including growing the team responsible for flagging inappropriate content to 10,000 next year. Google also is leveraging machine learning to identify and remove extremist content from YouTube.
These are critical moves because YouTube has come under fire this year multiple times for inappropriate ad placement. The result has been an exodus of advertisers from YouTube. Stricter content checks could bring those advertisers back.
Meanwhile, Google continues to be the forefront of AI. A Google supercomputer just created its own “AI child” which can identify objects in videos and photos with 83% accuracy. That is one percent better than man-made AI programs and represents a huge step in AI research.
Bottom Line on GOOGL Stock
It trades at only 31.2x this year’s earnings for 22.5% growth prospects. That is far too cheap for such a robust and strengthening growth story.
I’m taking advantage of the recent weakness to buy GOOGL stock at a deep discount.
As of this writing, Luke Lango was long GOOG and FB.