Usually, an earnings miss is problematic for companies, particularly those with the growth classification, as is the case with Alphabet (NASDAQ:GOOGL,GOOG), but Google stock really is something of an anomaly.
Late last month, the parent of internet search giant Google posted third-quarter earnings of $10.12 per share on revenue of $40.50 billion. Wall Street was expecting per share earnings of $12.42 on turnover of $40.32 billion.
Google stock suffered a minor blip in the wake of that report, not any harsh repudiation. In fact, analysts remain downright enthusiastic about Google stock. Forty-six sell-side analysts rate Alphabet shares and immediately following the earnings miss, nearly 20 boosted price targets on the stock. The consensus price target on Google stock is about $1,443, well above the Nov. 1 close of $1,273.74.
Neither missed earnings nor regulatory scrutiny seem to be able to derail Alphabet, confirming the notion that this is a stock that’s incredibly difficult (and dangerous) to be bearish on.
“While regulatory scrutiny remain a major risk with the potential for more fines [short-term], it is clear to us that it’s had no material impact on [Alphabet’s] business model to date,” said SunTrust Robinson Humphrey analyst Youssef Squali in a recent note. “Tech breakthroughs with [machine learning] and [artificial intelligence] should help drive the model further, in our view.”
Then there’s the recently announced takeover offer for wearable technology purveyor Fitbit (NYSE:FIT). Essentially what’s happening here is that Alphabet is buying innovation for $2.1 billion to further heighten its rivalry with Apple (NASDAQ:AAPL). The $2.1 billion is easily digestible for Alphabet, which had nearly $120 billion in cash on hand as of August.
Innovation at a Reasonable Price
Like Apple, Alphabet is an innovative company and its innovative DNA extends beyond its core competency of internet search. Even with a sprawling business model that touches various disruptive themes, such as artificial intelligence, cloud computing, autonomous vehicles and Internet of Things (IoT), Google stock isn’t excessively valued at 22.62x forward earnings.
Alphabet’s artificial intelligence footprint, something that has been around almost as long as the company itself, is something to behold and is likely to serve as a major driver of investor returns in the years to come.
“Across the company, machine learning and artificial intelligence (AI) are increasingly driving many of our latest innovations, from YouTube recommendations to driverless cars to healthcare diagnostics,” said the company in a 2018 regulatory filing.
Academics concur that Alphabet’s artificial intelligence opportunity is massive and potentially lucrative.
“Artificial intelligence has captured the attention of business people, scientists, and engineers worldwide,” according to Harvard University. “Across industries leaders are seeking ways to create value through machine learning and other frontier technologies. Companies like Google have made commercial strides into AI—from smart bots to facial recognition to semantic analysis.”
Healthcare and transportation, arenas in which Google dwells, are among the artificial intelligence opportunities that could drive returns in the future.
“If framed correctly, the opportunities for smart applications abound,” said the Harvard researchers. “For example, there’s potential to mitigate climate change via autonomous transportation, or develop better preventative healthcare through predictive modeling.”
Bottom Line on Google Stock
The AI footprint, the move into wearables via the Fitbit acquisition and a burgeoning cloud computing business are among the factors that will drive Google stock and remind investors this company, will appearing almost unwieldy, is well managed.
“As mentioned in our Oct. 28 Alphabet note, we view this as another step by Google to further improve its ecosystem by tapping into what Gartner estimates will be around an $88 billion wearable device market by 2023, growing at a 22% CAGR,” said Morningstar in a recent note. “According to Strategy Analytics and Counterpoint, Fitbit has a 5%-6% market share in smartwatches, which Gartner sees growing to $35 billion by 2023, from $17 billion this year.”
The cloud computing market is expected to grow by 25% over the next two years and Alphabet is poised to gain share there as well.
“Google has quickly leveraged the technological expertise it applied to creating and maintaining its private cloud platform to increase its market share in this space, driving additional revenue growth, creating more operating leverage, and expanding its operating margin, which we expect will continue,” adds Morningstar.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.