Alphabet Stock Is Still Not Reaping the Benefits of the Company’s Growth

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Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) stock made an impression following the company’s earnings report. GOOGL stock price shot higher by 9.7% on July 26 in the wake of  the results. That was the largest one-day gain by Alphabet stock in four years.

Alphabet (GOOGL) Stock Can Be Boosted by the Company
Source: Valeriya Zankovych / Shutterstock.com

The forward price-to-earnings (PE) ratio of Alphabet stock is just above 22, well below its average PE of the last five years, which is closer to 35. Still, with analysts expecting earnings growth of 10.7% in 2019, it remains unclear whether investors will continue to pile into Alphabet stock. However, Alphabet may be able  to lift GOOGL stock price going forward.

Alphabet on the Move

Alphabet stock has dropped in the wake of Google’s results, but GOOGL stock price still stood at $1,231 per share in early afternoon trading. When a company beats analysts’ average earnings per share estimate by $2.75 and registers 19.2% revenue growth despite its large size, investors have to take notice.

I have been a detractor of Alphabet stock in the past for many reasons. Alphabet holds over $121 billion of cash, but doesn’t pay a dividend. Facebook (NASDAQ:FB) and, recently, Amazon (NASDAQ:AMZN) are increasingly competitive with Google in the online ad market. Alphabet stock also has regularly traded at a higher multiple compared to Facebook or Apple (NASDAQ:AAPL), often without growing more rapidly.

Moreover, to the benefit (and perhaps also to the detriment) of Alphabet stock, the company has become what I called a “wellspring of innovation.” What began as a search engine has now become a conglomerate. From the self-driving cars of Waymo to Google Glass, Alphabet continues to invent products which could each support separate companies.

Despite my criticisms, Alphabet stock will rise, perhaps faster than the S&P 500. However, the company’s conglomerate structure is likely to hamper GOOGL stock price. For example, some  estimate the value of Waymo alone at $175 billion. Even after its July 26 run-up, the market cap of Alphabet stock stands at about $850 billion, suggesting that Alphabet would be more highly valued if it separated into multiple businesses

Will the DOJ Probe Hurt the Owners of Alphabet Stock?

Alphabet now faces an antitrust probe by the Department of Justice (DOJ). I do not think DOJ  will break up the company.

However, a breakup could be the best thing to ever happen to the owners of Alphabet stock.. When the government broke up Standard Oil, the combined value of the  separate companies created by the break-up exceeded the value of Standard Oil  by more than fourfold. After the breakup of AT&T (NYSE:T) in 1984, much of the company came back together, and its valuation was more than twice as high as that of the original AT&T stock.

Given those facts, it seems like the holders of Alphabet stock should root for the DOJ to divide the company. Or if they feel such a move is too extreme, they should at least push GOOGL to unlock some of this value. I realize Alphabet will not let go of all of its inventions, nor should it. Still, if the company can spin off some of its creations, Alphabet stock and the subsequent stocks created could generate larger gains for shareholders. Paying a dividend would also likely boost Alphabet  stock by making it attractive to a new group of investors.

The Bottom Line on Alphabet Stock

Perhaps the potential of Alphabet stock will be unlocked by antitrust measures. More likely, the company will increase  GOOGL stock price through  its own actions. Still, until the market become more aware of Alphabet’s initiatives, traders will not benefit from the full potential of GOOGL stock.

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/2019/08/alphabet-stock-benefits-growth/.

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