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Stock Spotlight

Alphabet keeps cards close to vest

 
Recent Price
$1,202
 
Dividend
$0.00
 
Yield
0.0%
 
P/E Ratio
26
 
Shares (millions)
701
 
Long-Term Debt as % of Capital
2%
 
52-Week Price Range
$1,273.89 - $970.11

Alphabet ($1,202; GOOGL) produces operating momentum rare for a company of its size. Of the 30 largest stocks in the S&P 500 Index by market value, only Alphabet, Amazon.com ($1,783; AMZN), Chevron ($126; CVX), and Facebook ($164; FB) grew earnings per share and sales by more than 20% in the past year. All four companies also generated growth in operating cash flow that exceeded 20%.

For Alphabet, that growth comes with a trade-off — its reticence. It refrains from offering specific guidance and is usually opaque about operations beyond its massive advertising business.

Given management’s reluctance to divulge many details of its business, Alphabet can seem like a black box for investors and analysts alike. But the stock’s growth profile and reasonable valuation make Alphabet a Focus List Buy and a Long-Term Buy.

Business breakdown

The advertising business — digital ads placed on Google.com, Gmail, Google Maps, YouTube, and other websites — generated $116.32 billion in sales last year (85% of total sales), up 22%. But it’s not clear how much each of these platforms contributes to the ad business, nor their respective growth rates.

For what would be a major business line for virtually any other S&P 500 company, Alphabet’s cloud-computing services are lumped together with its application store Google Play, home-security service Nest, Pixel smartphone, and Slate tablet. Altogether, this group of dissimilar products grew sales 33% to $19.91 billion last year (15% of total revenue). Yet, Alphabet offers few details about its cloud operations other than it’s a “fast-growing multi-billion-dollar business” with 5,000 customers that doubled its number of deals worth more than $1 million last year.

What management calls Other Bets produced $595 million in sales (less than 1%), primarily from internet and TV services, as well as its health-data business Verily. This unit also includes the automated-car business Waymo.

The company’s aggressive spending habits can cause investors to fret that costs may spiral out of control. Capital expenditures soared 91% to $25.14 billion last year as the company built new data centers, deployed undersea cables, and invested in other networking infrastructure. Looking ahead, management will only say that it expects capital expenditures to keep climbing in 2019, though the growth rate should “moderate quite significantly.”

That heavy investment has caused free cash flow to slip in five of the past seven quarters. But net cash rose 7% to $105.13 billion in the past year, representing about 13% of Alphabet’s market value. Among the largest 100 companies in the S&P 500, only Apple has stashed on its balance sheet more net cash relative to its market value.

Conclusion

Alphabet will never be mistaken for a value stock. At 24 times trailing earnings, the shares trade 20% below their own five-year median.

Alphabet Inc., 1600 Amphitheatre Parkway, Mountain View, CA 94043; (650) 253-0000; www.google.com

 

 
Quarter Per-Share Earnings* Sales Change Quarterly Price Range P/E Ratio Range
Dec '18 $12.77 vs. 9.70 22% $1,135.00 - $977.66 26 - 22
Sep '18 13.06 vs. 9.57 21% 1,271.96 - 1,007.20 31 - 25
Jun '18 11.75 vs. 8.90 26% 1,291.44 - 1,007.89 34 - 26
Mar '18 9.93 vs. 7.73 26% 1,187.45 - 984.00 33 - 27

 
Year (Dec.) Sales (Bil.) Per-Share Earnings* Per-Share Dividend 52-Week Price Range P/E Ratio Range
2018 $136.82 47.51 $0.00 $1,291.44 - $977.66 27 - 21
2017 110.86 35.90 0.00 1,086.49 - 796.89 30 - 22
2016 90.27 32.85 0.00 839.00 - 672.66 30 - 24
2015 74.99 24.34 0.00 798.69 - 490.91 33 - 20

 
Quadrix Scores
Overall Momentum Value Quality Financial Strength Earnings Estimates Performance
75 82 37 92 93 34 70

* Earnings exclude special items.
NA Not Available.
† Quadrix® scores are percentile ranks, with 100 the best.
e Dividend and yield estimated.

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