It hasn’t been easy sledding for stocks since early February and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) is no exception. To be clear, Google stock has held up, but its 49 basis point gain so far in 2018 lags the 6.6% return of the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ).
With that in mind, is it time to bail on Alphabet stock and look for something different? Traders may find better stocks to generate alpha, other FANG names like Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX), for instance, but investors should not leave out GOOGL.
Here are three reasons why we still feel Google stock can rally to $1,265, up 20% from current levels.
Alphabet’s Business Moat
A strong business moat may not be something that Tesla Inc (NASDAQ:TSLA) CEO Elon Musk finds very cool. But one of the most successful investors of all time in Warren Buffett loves moats. When it comes to tech, Google has essentially become impenetrable.
While nothing is safe forever, Google, Amazon, Netflix, these stocks may be as close as they come. The money has allowed Google to pour R&D into serious projects like Waymo and fund the purchase of home runs like YouTube. Incidentally, Google and YouTube are the two most popular websites in the world. By that merit alone, I’d say the business is pretty safe.
The word “Google” is now also recognized by the dictionary, something that most other brands have never been able to accomplish. Look up Amazon and you’ll find a river and a rainforest. Apple Inc. (NASDAQ:AAPL) is just a fruit in that book, while Netflix and Facebook Inc. (NASDAQ:FB) don’t even exist.
Waymo
We touched on Waymo, but let’s expand on that note for a second. Alphabet’s self-driving car unit has been flying under the radar over the past few years. That’s as Tesla’s Autopilot technology fascinated consumers and Nvidia Corporation (NASDAQ:NVDA) tantalized investors with its autonomous driving hardware and software solutions.
Every company from Mercedes to Uber to Intel Corporation (NASDAQ:INTC) is involved in autonomous driving at this point. While General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) are planning to launch fleets of self-driving car taxis in the future, Waymo is looking to do it very soon.
Waymo plans to launch its fully autonomous taxi service in Phoenix later this year, using Chrysler Pacifica minivans and Jaguar I-Pace SUVs. Riders can simply hail and pay for their robo-taxi via the app and catch their ride.
Last year, one analyst’s estimate said Waymo is worth $70 billion.
It’s not clear what potential this could have for profits, but GM has been pretty optimistic on its potential. The more services there are, the more those margins will get squeezed. But for now, Waymo has first-mover advantage and could lead the charge if it’s successful.
Growth and Valuation for Google Stock
Analysts expect Alphabet to grow sales by 23% this year and 18% in 2019. On the earnings front, they are looking for almost 40% growth in 2018 followed by just 7% growth in 2019. Interestingly, consensus 2019 earnings estimates fell by more than $1 per share over the last month.
Considering the huge growth in earnings this year, Alphabet still looks attractive despite the more modest 2019 expectations. We’re paying just 23 times this year’s earnings estimates. Google stock isn’t necessarily cheap, but the valuation is pretty reasonable given the powerful brand, long-term potential and current growth.
Aside from Google, YouTube and Waymo, the cloud and mobile growth are accretive to Alphabet too. In my mind, that trumps worries over rising traffic acquisition costs that some bears continue to cite.
Trading Alphabet Stock
Click to Enlarge
I have consistently called Alphabet stock a buy near $1,000 and we’ve gotten our chance to pounce more than once this year. Google stock now needs to holds above $1,050 or a retest of that $1,000 level is back on the table.
So long as GOOGL stays above $1,050 though, where its downtrend resistance line is, GOOGL can retest its 100-day moving average near $1,085. After twice topping out near $1,180, I think GOOGL can eventually power above $1,200 and test the $1,265 area, the average price target from Wall Street analysts.
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, NVDA and GOOGL.
