Alphabet's New Ventures Spell Long-Term Gains for the Stock

Google's very name is synonymous with online search. Yet the parent company, Alphabet , has expanded its business focus to a diverse range of cutting-edge technologies. Four growth stock experts, and contributors to MoneyShow.com, highlight the long-term bullish case. Gordon Pape, Internet Wealth Builder Alphabet is the umbrella company that owns Google (which includes Android and YouTube}, Nest (home automation), Calico (anti-aging research), Fiber (high-speed Internet), Google Ventures (new company investments), Sidewalk Labs (city infrastructure), and Waymo (driverless cars). First, the good news: Alphabet's revenues were above expectations, coming in at $40.5 billion for the quarter ending September 30. That was an increase of 20% over the same period last year (22% in constant currency terms). Mobile search, YouTube and cloud computing are the main drivers behind the increase. For the first nine months of the fiscal year, revenues were $115.8 billion, an improvement of 18.7% over 2018. Now for the negative side of the equation: Net income for the quarter was a shade over $7 billion ($10.12 per share, fully diluted). That was down from a profit of $9.2 billion ($13.06 per share) the year before. Despite the disappointing third-quarter numbers, Alphabet's year-to-date results show a slight gain in profitability, to $23.7 billion ($33.83 per share) from $21.8 billion ($30.95 per share). The drop in third quarter profits was caused by a big jump in expenses in several areas. Research and development cost $6.6 billion during the quarter, up more than 25% from the same period in 2018. Sales and marketing expenses rose almost 20%, to $4.6 billion, while general and administration was up almost 48% to $2.6 billion. Total third-quarter expenses were up about 25% from last year. Operating margin dropped from 26% last year to 23%. The company is cash rich, with over $109 billion in cash and marketable securities and virtually no debt. However, to date it has stuck to its no dividend policy. While it's understanding that management wants cash on hand for new investments, the fact that so much money is sitting idle suggests that, barring a major new acquisition, the board of directors may come under increased pressure to introduce a dividend. Rich Moroney, Dow Theory Forecasts Alphabet agreed to acquire Fitbit -- a company that makes wearable fitness-tracking devices, for $2.1 billion in cash. That price tag translates to $7.35 per share, a 19% premium to where Fitbit traded before news of the takeover surfaced. Fitbit, founded in 2007, has seen its shares struggle since going public in 2015, as Apple and Samsung pushed further into fitness trackers and smartwatches. With the deal, Alphabet hopes to develop its own wearable devices, utilizing the health data that Fitbit has collected from millions of users. Fitbit currently has a 10% share of the global wearables market, estimates industry researcher IDC. The deal is expected to close in 2020, though it could invite regulatory scrutiny. Separately, Alphabet has begun offering a rider-only taxi service in Phoenix, a promising development for its self-driving Waymo unit that may eventually move into fully-automated deliveries. In other news, Alphabet faces a court battle brought by an Australian regulator that accuses the internet giant of misleading customers about how it collects and uses personal-location data. Alphabet is a Focus List Buy. Jon Markman, Strategic Advantage Alphabet has now reported 17 consecutive quarters of 20% or greater revenue growth versus the same period a year ago. It is the model of consistency. This is important because, after all of this time, most investors still misunderstand the scope of what is happening with respect to digital ad sales. Slowly but surely, marketers are moving their ad budgets to digital and away from real world mediums like outdoor billboards, print media and television. And despite ad sales growth at Amazon , and steady competition from Facebook , Alphabet is still the 800-pound gorilla in the sector. eMarketer, an online data analytics researcher, found in March that Alphabet accounted for 37.2% of total U.S. online digital ad sales during 2018. The company has some of the best online properties, in Google Search, YouTube and Gmail. Soon product managers plan to bring Maps and other top tier Alphabet destinations into the monetization loop. Meanwhile, the company continues to make other bets beyond digital ad sales. Waymo, the autonomous vehicle subsidiary, is now offering rider-only taxicab service in Phoenix, Ariz. This is an actual robo-taxi. There is no attendant in the vehicle. And while robo-taxis still must get past regulators, investors should not ignore the scale of this opportunity. McKinsey, a global consulting firm, estimates passenger miles traveled in a densely populated areas like Los Angeles could reach 30 billion by 2030. That could be as much as a $20 billion business opportunity in the L.A. market alone. Waymo, and other bets, accounted for $155 million in sales during the quarter, versus $146 million a year ago. Losses swelled to $941 million, up from $727 million. However Ruth Porat, chief financial officer, stressed that Waymo is a long-term investment and the company is pleased with the progress being made. She expressed similar confidence for what is happening at Google Cloud. The company got a new chief executive earlier this year when Thomas Kurian was hired away from Oracle . Since that time he has been busy hiring sales staff and new managers. Those hires negatively impacted profitability during the quarter. Alphabet reported earnings of $10.12 versus the $12.42 analysts had been expecting, according to FactSet. However, the biggest contributor to the earnings shortfall was the mark to market value of Alphabet's passive stakes in Uber , Lyft and other recent new issues. That accounting may have contributed as much as $1.5 billion in paper losses. The bottom line is that investors should remain focused on the bigger trends. Alphabet's digital advertising business is growing at about 20% year over year. That operation is spinning off cash that the firm is investing in potential future high growth sectors. Currently, those businesses are sucking up money but Alphabet is well managed and in a great position to dominate those markets. Google shares trade at around 23x forward earnings and 6x sales. These are reasonable multiples. The shares are buyable for growth investors on pullbacks. Todd Shaver, Bull Market Report Alphabet is having a great year, up around 25% year-to-date and having just set a new all-time high. Although EPS of $10.12 missed estimates by $2.34, that's not the important metric here, as management previously noted that continued foreign exchange headwinds would ding the earnings for the quarter. Wall Street responded in knee-jerk fashion by selling off the stock, until cooler heads quickly prevailed and the bulls came charging back, sending the stock to new heights. There are too many growth stories here to ignore. With the company purchasing Fitbit, Alphabet is taking a proactive approach to the wearables market, which is sure to grow in size over the coming years as new technology increases the speed and efficiency of data delivery from wearables and the internet-of-things. And Google has launched its mass-transit app Pigeon into five more cities after launching it in New York. Pigeon may eventually be folded into popular traffic app Waze, or it could serve as a standalone product. Either way, Alphabet is slowly but surely working its way into all aspects of the consumer's life. How can you not love Alphabet? This is the most innovative and pioneering company in existence. The brand is so strong, Hollywood made a Vince Vaughn and Owen Wilson movie about two guys who interview for a job there. Is there anyone who thinks Alphabet won't be more valuable one year, three years and five years from now than it is today? We're certainly in Alphabet for the long term, and we're reiterating our $1,450 target price.

Alphabet's New Ventures Spell Long-Term Gains for the Stock

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