Investors Should Avoid Alphabet Until It Starts Doing One Thing

Until GOOG stock returns cash to shareholders, AAPL stock and MSFT stock are better bets

Alphabet Stock Performance Is Starting To Suffer From Dual Class Structure

Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) continues to prosper. For years, it has held dominant positions in both online ads and the smartphone industry. Though GOOG stock has fallen about 7% from its highs in July, GOOG stock price is generally still on an upward path.

However, the valuation of Alphabet stock has become high, compared with its large tech peers. Also, the elevated GOOG stock price will attract a different type of investor than it drew in prior years. Unlike Apple (NASDAQ:AAPL) or Microsoft (NASDAQ:MSFT), Alphabet has not adjusted to this reality by paying a dividend. I would avoid GOOG stock at these multiples until GOOG follows the lead of Microsoft and Apple and pays a dividend on its shares.

Alphabet Continues Its Dominance

Without question, Alphabet stock has become a revenue-generation machine. Its subsidiary, Google, generates 99% of its revenue. About 85% of that revenue comes from online ads, where it actively competes with Facebook (NASDAQ:FB). Also, Google’s Android operating system dominates, especially outside of the U.S. As of August, Android powered about 77% of the world’s smartphones.

Alphabet also utilizes many applications on the cutting edge of tech. Machine learning has dramatically improved its search engine. Moreover, its investments in areas such as self-driving cars and virtual reality should enhance Google’s reach and reputation.

GOOG Stock Will Keep Investors Rich

With a market cap of around $820 billion, Alphabet has become the fourth largest company in the world. Given its size, I no longer think GOOG stock or its voting counterpart, GOOGL, can make one rich. However, I think they will keep investors rich over the long-run.

Despite its large size, Alphabet remains a growth machine. Analysts expect its profit to increase 22.3% this year and 21.6% next year. They also believe that it will continue to generate double-digit profit growth for years to come.

However, investors will pay a premium for this growth. Based on analysts’ current net income projections of $39.45 per share, GOOG stock is trading with a forward price-earnings ratio of 30. With the notable exception of Amazon (NASDAQ:AMZN), that multiple appears to be high compared with other large tech names. Apple has a price-earnings multiple of 18.8, while Microsoft’s forward multiple comes in at about 26.5. Facebook has faced more challenges this year, but its forward multiple stands at around 23.

GOOG Stock, Unlike Many Peers, Lacks a Dividend

Also, while most think of Alphabet as a company on the cutting edge, it lags way behind its peers in one key area. Earlier, I referred to Alphabet stock as an equity that “keeps people rich.” However, large tech stocks, including not only Apple and Microsoft, but also much older tech companies such as Texas Instruments (NASDAQ:TXN) and IBM (NYSE:IBM), perform the same function. More importantly, all of these companies pay a dividend, while Alphabet stock does not.

Given Google’s revenue and profits, and the type of investors GOOG stock will attract in the future, the fact that Alphabet does not pay a dividend looks almost scandalous. In fairness, one can say the same about Facebook and Amazon. However, GOOG has over $102 billion in cash. Moreover, analysts expect the company to generate $137.2 billion of revenue in 2018 alone, representing a 23.7% increase from year-ago levels. Alphabet should be able to easily afford a dividend.

Additionally, investors who want to protect their wealth can buy AAPL or MSFT at a lower price-earnings multiple than GOOG stock and earn a consistently growing dividend. Until GOOG stock offers that same value proposition, I cannot bring myself to recommend this equity.

The Bottom Line on GOOG

Investors should not pay a premium for Alphabet stock as long as it fails to offer a dividend. The company holds a dominant position in tech thanks to its search engine, ad business, and smartphone ecosystem. These catalysts continue to keep GOOG stock price on an upward trajectory. However, Alphabet stock trades at a higher multiple than most of its peers. Furthermore, in spite of Alphabet’s massive revenues and its enormous cash hoard, the company refuses to return cash to its stockholders. Alphabet will continue to prosper for decades to come. However, until it pays a dividend, I believe that investors are better off buying AAPL and MSFT.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

 


Article printed from InvestorPlace Media, https://investorplace.com/2018/09/investors-avoid-goog-stock-starts-thing/.

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