Like Facebook Inc (NASDAQ:FB), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) has struggled to rally in 2018. While shares are still up a respectable 4.3% just nine weeks into 2018 — good for an annualized return of more than 23% — GOOG stock is severely lacking the returns of other FANG stocks like Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX), which are up 30% and a ridiculous 63% so far in 2018.
Do we bail on GOOG in favor of NFLX or AMZN?
Google stock is trading more like Apple Inc. (NASDAQ:AAPL), which is up about 4.6% in 2018. But stock performance isn’t necessarily indicative of the business. Meaning that, just because Apple is up less than 5% in 2018, doesn’t mean anything is wrong the company. In fact, business is robust and the balance sheet is pristine.
Alphabet is much the same way. GOOG stock will be a huge beneficiary of tax reform. It continues to benefit from secular trends in cloud computing and online search. Maybe there’s a lingering fear that Amazon will out-duel it in advertising down the road or that its robust cloud business will kill off Google.
I don’t think either one of those scenarios are necessarily the case. Google trails both Amazon and Microsoft Corporation (NASDAQ:MSFT) in the cloud. If anything, perhaps the No. 3 player has a chance to take market share from the two behemoths ahead of it.
On the advertising front, it’s somewhat concerning that Amazon is becoming a go-to search tool by online shoppers. Many don’t even bother to “Google” a product they know is likely to be on Amazon’s website, hence they subconsciously cut out the middleman (i.e., Google).
But for everything else — be it medical queries, academic research, etc. — we still turn to Google. So long as the internet remains in use, so too will GOOG.
Valuing Google Stock
Search is still the bread-and-butter business for GOOG at this point, despite its “other bets” — like Nest, Verily and Google Fiber, among others. However, some of these other bets are paying dividends. While Google has had a few swing-and-miss moments, others like Waymo have paid off big time. The unit has been valued at $70 billion by some analysts and as self-driving cars become more prevalent, you can bet Waymo will be playing a larger role.
While these other bets are a drag on the bottom, they do give a nice bump to the top line. And, not that it really matters to some degree, because GOOG remains insanely profitable.
Analysts expect revenue of almost $134 billion this year, up nearly 21% year-over-year. For 2019, they again expect robust growth, with estimates calling for 17% growth to $156.5 billion. Earnings are even more exciting, with forecasts calling for 28.4% growth this year and 17.1% growth next year. With earnings growth outpacing revenue growth, it signals an increase in margins.
As we already pointed out, Google stock will be the beneficiary of tax reform, allowing more money to fall to the bottom line. Unlike Apple or Microsoft, GOOG doesn’t meaningfully participate in the capital return game. When it eventually does, many may say it’s the end of its growth days. That’s an unfair way to look at Alphabet in my view, given that this $760 billion company generates so much money, it has more than enough to grow and simultaneously distribute its cash to shareholders.
Trading GOOG Stock
The thing I really like about Google stock though? Shares trade at just 26 times this year’s earnings and 22 times next year’s estimates. That’s a pretty fair price to pay given its 20% revenue growth and near-30% earnings growth in 2018. The fact that Google will only see a slight deceleration in 2019 is promising as well.
Right in the midst of the February correction, we said to buy GOOG at $1,000. If you didn’t have a limit order in though, you likely missed it. Google stock had an intraday break below $1,000 before quickly recovering its losses.
In doing so, it put in a short-term top near $1,150. I still like GOOG between $1,000 and $1,020 as an initial position. If the stock happens to break below, $940 looks like a great level to add at.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a long position in AAPL.
