Global internet giant Alphabet (NASDAQ:GOOGL) had a tough run in 2018. Google stock entered the year just under $1,100. It bounced around quite a bit throughout 2018, rising as high as $1,300 and falling as low as $980. Ultimately, though, GOOGL finished the year exactly where it had started the year, at just under $1,100.
There are reasons to believe 2019 will be a much better year for Google stock. There’s also reason to believe the 2019 rally will get started in early February, when Alphabet reports fourth-quarter earnings.
Those numbers should be pretty good given multiple positive operational developments towards the end of 2018, and in the beginning of 2019. Also, headwinds which plagued GOOGL in 2018 are starting to move into the rear-view mirror. This coupling of positive developments and moderating headwinds should lead to strong numbers in early February.
Strong numbers which confirm improving trends will result in two things. First, investor sentiment will improve, and GOOGL’s multiple will expand. Second, analysts will revise 2019 and 2020 EPS estimates higher.
Thus, in 2019, Google should benefit from a double tailwind of multiple expansion and earnings growth. Both of those tailwinds will emerge in early February, making GOOGL look like a compelling buy in late January.
Multiple Positive Developments
There have been multiple positive developments for Alphabet ahead of fourth-quarter earnings.
Towards the back-half of 2018, Alphabet focused on rolling out free, ad-supported original and rerun content to YouTube users. These efforts really picked up in the final months of 2018. Specifically, YouTube started rolling out ad-supported Hollywood movies in late 2018, a move which expands the platform’s viewership and digital video ad real estate.
Also, AT&T (NYSE:T), the last holdout from an early 2017 ad crisis on YouTube, announced in January that they are finally advertising on YouTube again. AT&T is one of the largest U.S. brand marketers by total ad spend, so the re-emergence of AT&T ads on YouTube is more than just a drop in the ocean.
It’s a also a sign that YouTube advertising is now viewed by brands as 100% safe, and that the early 2017 extreme content related ad crisis is entirely in the rear-view mirror.
Broadly speaking, then, it looks like YouTube had a really good quarter. Considering YouTube is the heart of Alphabet’s ad growth engine, strong YouTube results likely propelled better-than-expected ad revenue growth in Q4. That will be a welcome sight for investors.
Elsewhere, Alphabet scored a big win in November when Disney (NYSE:DIS) ditched Comcast (NASDAQ:CMCSA) and picked up Google Ad Manger to handle digital advertising campaigns.
There were some C-suite shake ups at Google Cloud, which many investors and analysts think will allow this segment of Google to accelerate in its growth trajectory. Waymo launched the first-ever autonomous ride-sharing service in Phoenix. And, Google Shopping launched in India, which is home to arguably the world’s most rapidly expanding digital economy.
Overall, there were multiple positive developments in late 2018 and early 2019 which suggest that Alphabet’s Q4 earnings report could be quite good.
Headwinds Reversing Course
Throughout 2018, the one major headwind that weighed on Google stock was out-sized TAC growth, which dragged down margins and muted profit growth despite robust revenue growth.
In late 2018, there were signs that this headwind was moving into the rear-view mirror. TAC growth slowed, and management sounded a bullish tone on conference calls that TAC growth would continue to moderate going forward. As TAC growth slowed, margin pressures eased.
If TAC growth continues to slow in 2019, then margins should start expanding again. That would mark a huge inflection in the GOOGL narrative from margin compression to margin expansion.
Such an inflection would have a hugely positive impact on Google stock.
Headwinds related to regulation are gradually fading, too. Bad press headwinds are also increasingly “old news”. Overall, the negatives about GOOGL that dampened profits and sentiment in 2018, won’t persist in 2019.
Valuation Is Attractive
At current levels, the valuation on GOOGL is very attractive.
The stock trades at just under 22X forward earnings. That’s a very low multiple for an internet giant growing revenues at a 20%-plus clip. Indeed, a ~20 forward multiple coupled with ~20% revenue growth and margin stabilization over the past five years led to GOOGL stock rising by nearly 90% during that stretch.
A similar dynamic should play out over the next several years.
Revenues will grow by ~20% per year, thanks to slowing ad growth offset by rising cloud growth and new revenues from Waymo. Margins will expand slightly due to slower TAC growth. That combo on top of a ~20 forward multiple should power healthy gains over the next five years.
Bottom Line on Google Stock
Google stock had a rough 2018. Those rough times won’t repeat in 2019. The stock is attractively valued here with secular growth drivers and improving underlying trends. That combination should lead to a good year for Alphabet stock.
As of this writing, Luke Lango was long GOOGL.
