This Chart Implies That Google Stock Is Due for a 20% Rally

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GOOG stock - This Chart Implies That Google Stock Is Due for a 20% Rally

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[Editor’s note: A previous version of this story stated that Google’s cloud business is slowing, but that statement was gleaned from slowing growth in Google’s “Other” segment. It has since been corrected.]

All the once-loved FANG stocks have been destroyed during the recent market selloff. But the one FANG stock that has noticeably outperformed its peers has been Alphabet (NASDAQ:GOOG). While Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), and Netflix (NASADQ:NFLX) have all plunged more than 30% during the selloff, GOOG stock is currently less than 20% off of its recent highs.

Why has GOOG been relatively resilient? Because its fundamentals are rock-solid, its financials are defensive, and Google stock is cheap relative to its internet peers. More specifically, Alphabet is the internet, and the internet isn’t going away any time soon. The company’s balance sheet features a ton of cash and hardly any debt, and its business produces huge cash flows. And Alphabet stock trades at just 23 times its forward earnings, which is a far cry from the 50-plus forward multiples of Netflix and Amazon.

As a result, GOOG stock should be relatively strong during turbulent times. That doesn’t mean the stock is exempt from selloffs. To be sure, GOOG did briefly enter bear-market territory in mid-December.

But Alphabet stock stayed above the critical $1,000 level and is now bouncing higher with the rest of the market. That is a bullish sign. GOOG stock has tested and held this $1,000 level three times before. Each time, the stock rallied more than 15% over the next one to three months.

The fundamentals of Alphabet indicate that Alphabet stock could rally 20% above its current levels, meaning that history may repeat itself. If history is in the process of repeating, this would be a great time to load up on Alphabet stock.

History Says a 20% Rally Is Coming

The most important level for GOOG stock is the critical $1,000 level.

GOOG stock burst above $1,000 in October 2017 and has not consistently traded below that level ever since. The shares have dropped close to $1,000 and sometimes even moved below the critical level. But many investors always immediately sought to buy GOOG below $1,000, and that usually resulted in a significant rally.

Let’s look at history. GOOG stock has tested the $1,000 level three times since it first crossed above that level in October 2017. The first test was in December 2017. GOOG held $1,000, and within two months, had rallied more than 15% above $1,000. The second test was in February 2018. GOOG stock held $1,000, and within a month, had rallied 15%. The third test was in April 2018. GOOG again held $1,000. Within three months, Alphabet stock had nearly reached $1,300.

Thus, Alphabet stock has tested and held the $1,000 level three times before. Each test has historically been followed by a reversal, which usually lasts one to three months and increases the stock price by about 20%.

Yet again, in mid-December 2018, GOOG tested and largely held the $1,000 level. Ever since, the stock has bounced higher. It currently trades around $1,045. If history were to repeat, GOOG could rally towards $1,200 within the next few months.

The Fundamentals of GOOG Stock Remain Healthy

Charts are cool. But without fundamentals, they don’t tell us much. Fortunately for the owners of Alphabet stock, the company’s fundamentals currently echo the charts and pave the path for a 20% rally in the foreseeable future.

The long-term fundamentals of GOOG remain favorable. Between Google search and YouTube, Alphabet is still the king of the digital-advertising world. The digital-ad business is still growing at a 20% clip, and will continue do so as more advertisers migrate to YouTube and Google search grows in developing internet markets like India.

Based on slowing Google Other growth (of which Google Cloud is a part of), I believe the company’s cloud business is slowing, but it, too, is expanding by 20% annually and has long-term staying power in the continuous-growth-cloud market. This market won’t get hit by an economic slowdown. If anything, a slower economy will push cloud adoption rates higher as companies look to cut their costs by migrating to the cloud. Also, there’s a new boss at Google Cloud, and the unit’s new leadership could find ways to boost its growth.

Meanwhile, the smart-home, AI, e-commerce, and autonomous-driving markets cumulatively give Alphabet the opportunity to raise its growth by large amounts over the next several years.

Alphabet’s only real problems are regulation and margins. But those concerns are overstated. Regulators are having a tough time reigning in Facebook. They will have an even tougher time tying Alphabet’s hands. Alphabet’s suite of digital properties (Google search, Gmail, Google Docs, so on and so forth) together comprise a crucial portion of the internet. That makes Alphabet tough to regulate, so GOOG almost definitely will not be hurt by adverse, new laws in the foreseeable future.

Also, the company’s margins are falling because of the shift to mobile, which carries higher TAC (traffic acquisition costs). But Google’s margins have started to stabilize over the past two quarters, thanks to moderating TAC growth. Management sounds confident that TAC growth should continue to be moderate, implying that Google’s margins may be near a bottom and could soon reach a positive turning point.

Overall, Alphabet’s fundamentals remain rock solid, and with a price-earnings multiple of 23 times forward earnings, the valuation of GOOG stock is overly conservative. A swing in sentiment and momentum will normalize that valuation, and push Alphabet stock higher.

The Bottom Line on Alphabet Stock

GOOG stock is a long-term winner that’s undergoing some near-term growing pains. But the stock’s technicals and fundamentals imply that those pains are mostly in the rear-view mirror, and that the shares are due for a 20% rally after holding the $1,000 level.

As a result, now looks like a solid time for investors to increase their exposure to GOOG.

As of this writing, Luke Lango was long GOOG, FB, AMZN, and NFLX. 


Article printed from InvestorPlace Media, https://investorplace.com/2019/01/this-chart-implies-that-google-stock-is-due-for-a-20-rally/.

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