Here’s a riddle. What company can blow more than $3.5 billion on “other projects” this quarter and still have more black all over its income statement than at any time in its history? The advertising behemoth Alphabet, formerly known as Google.
And I think it’s important to note that this was the first real Alphabet quarter where all of the other business lines were broken out. Why? Because investors are going to begin factoring those other projects into Alphabet’s multiple as they try to discern whether Alphabet can overcome a potential downturn in its core advertising business long-term.
Google is notorious for being able to simply and quietly ratchet its share of the search market up or down each quarter as it pleases, pushing more or less revenue within a few percentage points of growth. Why doesn’t it just go all out to capture the entire market? Regulatory worries of being a monopoly, pure and simple.
But Google investors over the past 4 plus years have come to see the advertising business as a sort of technology REIT. It’s going to produce a ton of cash each quarter, and there’s basically nothing that’s going to stop it. Google’s stock has risen and fallen roughly based on investor perception of the long-term threat to that cash flow, and the company’s ability to constrain spending in other areas.
Alphabet just blew their expectations for fourth quarter 2015 completely out of the water, and specifically this quarter that was very important.
Alphabet now trades at the highest trailing four quarter EPS and revenue multiples of the past 10 years. With those high multiples come very high expectations of growth, which were certainly accounted for in the stock given its strong run into the print yesterday.
More important for Alphabet than living up to its multiple though was the calm that this report is going to bring to investors when they see a $3.5 billion loss in the other Alphabet business lines cumulatively. That’s a lot higher by about $2 billion than analysts had expected, and still the stock is soaring today. It’s soaring because the core Google business, and specifically YouTube, is cranking. While ad pricing metrics are down across the board, volume is way up, and the strength of the potential YouTube future growth looks way under priced in the stock.
Google’s advertising REIT is incredibly strong, which gives co-founders Sergei Brin and Larry Page the room they need to invest in all of their other “moon shots” (VR/AR, driverless cars, fiber, healthcare, etc.). Those businesses are certainly the future of Alphabet, and knowing the amount of brainpower and business acumen they have in the valley working on these projects leads me to believe some will end up being multi hundred billion dollar companies.
If I needed to own one stock and only one stock for the next 10 years, right now I would say Alphabet (GOOGL). The mix of a strong core business with sticky investors, and potential high impact future businesses being built, gives me confidence that at a 16-19 percent year over year revenue growth rate, the multiple isn’t coming down any time soon. If GOOGL can weather this very volatile market we’re currently in where growth multiples have been slashed almost across the board, it’s going to fare every better in a healthier one to come.
[“source -cncb”]
