October 21, 2016
Alphabet Inc. (GOOGL) is trading near 52week highs, can it go much higher?
-Google launches new applications to innovate and find possibly new streams of revenues
-EU antitrust charges on android is a major concern, that can affect stock price
-Valuation shows some mixed signs, it is not extremely expensive but also not a bargain
– EU antitrust charges on android is a major concern Alphabet Inc.(GOOGL) stock price closed on Friday 23rd September 2016 at $814,96 per share, having made an impressive one year rally return of almost 28%, up from $638,37 per share stock closing price on September 30th 2015. Is this stock price rally sustainable, and if yes what are price levels to watch for?
Google launches new applications to innovate and find possibly new streams of revenues
Recently Google launched a new application to make travel planning and organizing easier, called Google trips. Travel industry is a very large business and apparently Google wants to monetize new sources of revenues. But Google also is investing capital and exploiting alternative sources of revenues in many other industry and business sectors, from health sector and pharmaceuticals, to autonomous vehicles technology and new ventures in startups companies. Investing capital in research and development has both a positive and a negative result. While exploring new business ideas, technologies, marketing opportunities can provide significant income and boost profitability as now Alphabet is a conglomerate which owns Google, there can be also significant delays and capital invested with uncertain financial results. Startups carry a lot of risk, and returns come only after many years, while capital committed is also significant. Alphabet recently reported according to the news to be interested to buy Twitter. This move can be advantageous if the mass user audience of Twitter is exploited to add mobile advertising revenues, but there is the risk of Alphabet overpaying for a company which struggles with profitability. Is Alphabet certain or confident that can make a profit utilizing Twitter as a business advertising platform, when Twitter itself cannot be profitable during last fiscal financial years?
EU antitrust charges on android is a major concern, that can affect stock price
Google has to face soon European Union claims that on Android system it favored its own browser and in fact restricted competitors to advertising and other mobile services. Google has a dominant position in Android operating system and if European Union decide that indeed Google breached antitrust and competition cases, a potential large financial fine of about $7.4 billion could be imposed to Google with at least a short term negative impact on its stock price.
Valuation shows some mixed signs, not at extreme levels
Google has been able to produce last 5 fiscal years increasing net income and earnings per share for each year. But there is a mixed overall image as in last 5 quarterly earnings per share releases, it has 3 negative surprises. Operating margin and net margin have been steadily declining over last 5 years. Return on Equity and Return on Assets have also followed a declining 5 years trend. Earnings per share growth for next 3-5 years is estimated to 15.77%, which is not unrealistic. What about relative value analysis of Alphabet Inc. (GOOGL) to its Sector, Technology and its Industry, Internet Information Providers? Alphabet Inc. has a trailing twelve months P/E ratio of 30.98, lower than the industry P/E of 39.34 but higher than the sector P/E of 17.87. Trailing twelve months P/S ratio for Alphabet Inc. is lower than both the relevant ratios for its sector and industry, P/B ratio for most recent quarter is lower for Alphabet compared to the industry ratio but higher than the relevant sector ratio. P/CF ratio for Alphabet Inc. for trailing twelve months is lower than both the ratios for the industry and its sector.
Comparing the main peers of Alphabet Inc.(GOOGL) , Baidu Inc.(BIDU,) Yandex(YNDX), Yahoo Inc.(YHOO) and Microsoft(MSFT) on a relative valuation for main financial ratios P/E,P/S and P/BV we notice that Alphabet Inc.(GOOGL) has only lower current P/E than Yandex, P/BV for Alphabet Inc. is higher only compared to Yahoo Inc. ratio and P/S ratio for Alphabet Inc. is higher compared to its peers ratios with the exception of Yahoo Inc., which has the same ratio of 7.34. If we add Facebook Inc. (FB) to the comparative analysis then Alphabet Inc. has all its mentioned ratios lower than Facebook.
Having a quick look at technical analysis Alphabet Inc. (GOOGL) is trending upwards with current price above the simple moving averages of 50 and 200 days. There is resistance at current levels where 52 week high of $819.06 per share is, but above this there are no significant resistances. We think at current levels Alphabet Inc. (GOOGL) is a hold, mainly due to its recent stock price rally. Adding positions to the price range of $780-$790 per share with 12 months target price of 10% and range of $890-$900 per share.
The author does not own any Alphabet Inc. (GOOGL) stocks. This is just financial analysis,not an investing recommendation.Sources used are Google Finance,Zacks,MorningStar,Reuters.