How Alphabet Inc Is Avoiding the Facebook Trap

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Google is now the House of Pichai.

Since becoming CEO of GOOGL, the dominant unit of Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), in 2015, Sundar Pichai has more than earned his new billionaire status by artfully directing the company around the shoals that are now devouring Facebook, Inc. (NASDAQ:FB).

Instead of being a “content” company, Google is a “data” company. Throughout his career at GOOGL, Pichai has focused on products that integrate with Google data services — the Chrome browser, Android, the Chrome operating system and Nest.

Pichai has also moved away from “content.” The Google Plus social network was de-emphasized. Content sites like Google News and Google Finance were never monetized.

For this, investors should be applauding Alphabet stock. Instead, they ran for the hills after the company reported first quarter results of a net income of $9.4 billion, $13.33 per share on revenue of $31.15 billion. Operating cash flow for the quarter came to $11.64 billion.

Why They Sold GOOGL Stock

The top line was up 26% year-over-year, and the bottom line up 72%. Yet the shares tanked, dropping $50 from the previous day’s close, to $1,022, and taking other big tech stocks with it.

The overreaction means that as Apr. 25 trading opened, GOOGL shares could be had for a price-to-earnings ratio of 27, only slightly higher than the average S&P stock.

What rattled investors was the “spending spree” that is transforming Google from a search company into an international telecommunications giant. The company put $7.7 billion to work during the quarter, building undersea cables and data centers and buying prime Manhattan real estate.

The company also closed on its $1.1-billion purchase of smartphone expertise from Taiwanese company HTC, which will make its Android phones more direct competitors with the Apple Inc. (NASDAQ:AAPL) iPhone line.

Google no longer wants to be Facebook when it grows up. It wants to be Amazon.com, Inc. (NASDAQ:AMZN). More to the point, it wants to be a cross between Amazon and Apple.

The Only Way Forward

Maybe it’s natural that some people would panic over that aspiration. Amazon is a fierce competitor, and so is Apple. But if you’re going to ask people to let you use their data, and that’s what all big data companies do, you need to deliver value for that data.

You also need to monetize that data through something other than advertising. Google’s moves into hardware and telecommunications let it do just that. There is a short-term cost in terms of margins, but Google is becoming what AT&T Inc. (NYSE:T) should have been and what we all claim a great American business should be: forward-thinking and risk-taking.

Unfortunately, analysts are telling investors to prefer the monopoly profits of AT&T, which Google’s global internet network is replacing, or the ad-supported arguments of Facebook and Twitter Inc (NYSE:TWTR). In my view, this is brain-dead thinking.

Google now has $103 billion in cash and short-term securities. Its asset base is now nearly $207 billion. It has less than $4 billion of long-term debt. This is holding up a market cap of $744 billion. If you want to play the old ex-cash game (as was once done with Apple), GOOGL stock now sells for just a little over three times its asset base and four times its expected 2018 revenue.

Yet that revenue is growing sharply. It’s going to grow even more sharply as hardware sales accelerate. You can get all that for just a tiny premium over the average S&P stock.

What are you waiting for? I’m not waiting for much longer.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance, The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in T and AMZN.


Article printed from InvestorPlace Media, https://investorplace.com/2018/04/how-alphabet-is-avoiding-the-facebook-trap/.

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