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Alphabet Inc Is at Crossroads, but Offers Investor Certainty

Alphabet stock - Alphabet Inc Is at Crossroads, but Offers Investor Certainty

Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) stands at a crossroads. GOOG stock benefits from a highly profitable advertising business revolving around its search engine. Still, when one looks at news articles related to Alphabet, practically all of the focus centers around non-core offerings.

Whether any of these subsidiaries will grow into a major revenue source remains unknown. Alphabet’s core business dominates search and search-related advertising. However, its non-core businesses must compete with other large tech companies to take market share. With the focus on the future and non-core products, Alphabet stock stands as a known winner as it faces the unknown.

Alphabet Stock Benefits From Long-Term Thinking

Despite its status as the second-largest market cap stock in the world — only Apple Inc. (NASDAQ:AAPL) is larger — GOOGL maintains a relatively low valuation. Due to expected earnings growth in this fiscal year, the forward price-to-earnings (PE) ratio stands at about 28. That will come down as well, since average profit growth has and will continue to exceed 20% per year.

This also compares well to its fellow FAANG stocks. Apple and Facebook Inc (NASDAQ:FB) trade at slightly lower multiples. However, Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX) maintain multiples well into the triple digits.

As I mentioned in earlier articles, Alphabet derives about 90% of its revenue from advertising. However, one might not know it from the latest publicity about the company. Most of the hype focuses on products such as Google Home, cloud applications, Google Fiber or Waymo, which focuses on self-driving cars.

This non-core focus for GOOG stock is driven by the company’s biggest worry — what it does after advertising growth slows. The various subsidiaries remain the answer. They only generate a small percentage of revenue for Alphabet stock now, and many will not succeed.

Still, a few likely will do well, and Alphabet stock will benefit at that time. To Alphabet’s credit, it’s not making the same mistake Microsoft Corporation (NASDAQ:MSFT) and Intel Corporation (NASDAQ:INTC) made. Although both companies dabbled in other areas, both of these stocks fell and stayed low for years as their core PC businesses declined in prominence. Alphabet is not waiting for advertising to decline before building its next big profit engine.

What Will Alphabet Do With Its Cash?

The good news for holders of GOOG stock is that the company has time. Advertising still enjoys double-digit growth. Also, the company holds little debt and over $100 billion in cash on its balance sheet. If it fails to create a new revenue source, it can always buy one.

What the company will do with that cash remains on the minds of GOOG stock investors, especially with large amounts coming home. The company took a $9.9 billion tax hit to its balance sheet in the previous quarter in order for Alphabet to bring home the cash that’s currently held overseas. One analyst estimates that overseas cash amounts to about $64 billion.

What will happen to that cash remains unclear. Most of the cash that the company spends goes to research and development, buying companies, or buying back company stock. However, GOOG stock also stands as the largest stock to not pay a dividend. Adding a dividend would likely boost Alphabet stock by bringing in conservative and income-oriented investors. With its large cash position, it can afford this option to grow Alphabet stock.

Final Thoughts on Alphabet Stock

GOOG stock stands as a certain play amid its own uncertainty. The company dominates its high-growth search and advertising business. However, anticipating a slow-down there, it has ventured into non-core businesses. The market cannot yet tell which or even whether any of these offerings will become a major Alphabet revenue source.

However, with over $100 billion in cash on its balance sheet, it can likely buy a revenue source if it fails to create one. Also, despite this cash hoard, the company has yet to offer a dividend. Offering steady cash payments would likely endear GOOGL stock to income-oriented buyers, driving the stock price higher. Still, with its solid business and strong cash position, Alphabet stock remains a solid, long-term hold no matter what direction the company takes.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.

 


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/alphabet-inc-goog-stock-offers-investor-certainty/.

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