Alphabet Inc stock is likely to outperform in 2017.
Shares of Mountain View, California-based Alphabet Inc (NASDAQ:GOOGL) had a much better start to 2017 after finishing 2016 with just a modest return of 2%. Investors did not bid GOOGL stock higher in 2016 even after the company posted continuous double-digit revenue growth throughout the year. GOOGL stock is already up more than 8% YTD and we believe it is most likely to outperform in 2017. While Alphabet Inc's search and digital advertising businesses continue to be key revenue drivers for the tech behemoth, some latest developments suggest many more key growth drivers for the company going ahead. These new growth drivers suggest GOOGL stock could be headed much higher. Here's Why.
YouTube To Bring In More Ad Dollars Now.
Alphabet Inc's video platform YouTube recently unveiled YouTube TV, its live TV streaming service. The subscription costs $35-a-month for a package of 40-plus channels. However, there are a quite a few holes in the YouTube offering. As it does not include some of the major networks like AMC Networks, Discovery Communications, Time Warner, A+E Networks and Viacom networks and this service is not available in all regions of US, an incremental roll-out is planned. However, this is a step in the right direction. YouTube was the biggest driver of ad revenue growth for Alpahbet Inc in 2016. Alphabet Inc does not disclose the break up of revenue from YouTube alone but Jefferies analysts calculated that it brought in about $12 billion in revenue last year. With YouTube TV now, Google can have a crack at the TV ad market.
Though the advertising details of YouTube TV have not been disclosed, industry experts see YouTube helping Google get a pie of the TV ad market. William Blair‘s Ralph Schackert is very bullish over the long-term about YouTube's latest offering as he points out "TV advertising is a $185 billion annual market, and pay TV is $275 billion, therefore, both are very attractive markets for YouTube to chip away at over the longer term." The TV ad market would be extra add dollars YouTube would bring, in addition to the ones it is currently making on its platform. According to the latest data disclosed, people now watch 1 billion hours of YouTube per day. The rise in viewing hours could help it grow revenues at a much faster pace.
Another key point to note here is that with YouTube TV you also get many other value added benefits, one of them being access to YouTube Red, a $10 per month original content service from YouTube. A recent study also suggests original content is helping Google’s YouTube get new subscribers. However crowded the competition Youtube's offering is likely to appeal to a niche audience. If AT&T’s DirecTV Now which was so buggy at launch can manage to "acquire 200,000 subscribers in its first month, without impacting its rivals’ growth," according to Sling TV CEO Roger Lynch, then YouTube is expected to do much better than that. If that happens to be true, then as William Blair‘s Ralph Schackert suggests, YouTube may receive "a warm reception from TV advertisers".
Alphabet's Recent Upgrade To AA-plus Corporate Credit Rating Is A Bullish Signal.
Alphabet Inc was recently upgraded to AA-plus corporate credit rating at S&P Global. Alphabet's latest rating is only one rating below Standard & Poor's AAA rating, the scale's highest level. This highest level rating is only exclusively awarded to Microsoft and Johnson & Johnson. This upgrade clearly suggests the strong future outlook of the tech giant. To quote S&P Global analyst David Tsui: "The ratings upgrade reflects Alphabet’s consistently strong operating performance, despite a challenging and evolving digital advertising market, while it continues to maintain a conservative financial policy and strong liquidity profile." All this adds to many growth drivers in front of the parent body of the search engine giant Google. Alphabet Inc's next growth cycle could be closer than we think. As a Motley Fool post highlights, Alphabet’s Waymo leads the field in driverless car space and "could be moving toward monetization sooner than anyone else."
Summing It Up.
GOOGL stock has made a good start to the year and in a recent research note, Goldman Sachs reiterated their buy rating on shares of Alphabet Inc with a price target of $970.00. This reaffirms the belief that GOOGL stock is headed higher. With YouTube TV, Google may work itself into a position of strength to tap into the massive TV ad market, which could help revenues grow faster than expected. In Waymo, Alphabet Inc may soon find its next big growth driver with the driverless car trend picking up pace. As a The Street post points out with Alphabet trading at a forward multiple of 22, GOOGL stock "comes at a massive bargain to the internet service and software peer group average of 48 times which is heavily skewed by Amazon's astronomical forward price-to-earnings ratio of 117." This is after taking into account projected 19% EPS growth of GOOGL stock over the next 5 years. Hence, long-term investors should buy GOOGL stock, and buy more of it on every dip.
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