- Alphabet Inc. is set for its biggest product launch ever.
- Alphabet stock is up over 20% in the last one year.
- Can new products drive Alphabet stock price higher?
Google parent company Alphabet Inc. (NSDQ:GOOGL) is setting up for the biggest product launch in its history. With a slew of new products set for release on Tuesday (October 4), will there be enough catalysts to lift the Alphabet stock price? Analysts at Jeffries and RBC capital definitely seem to agree, hiking their Alphabet stock price targets in recent notes to investors. Alphabet stock price has soared 20% in the last one year. However, the year-to-date performance of Alphabet stock has been muted, rising 2.9% in comparison to the Nasdaq Composite's (INDX:COMPX) 5.9% gain. Are we on the verge of yet another rally in Alphabet stock price? Let's understand...
Alphabet Inc's Biggest Product Launch
Alphabet Inc. is set for its biggest product launch ever, which is scheduled for Tuesday. The company is set to unveil a number of devices which will leverage the firm's advances in AI, search and mobile. The biggest launch will be that of Google Home, a connected smart speaker which will take on Amazon.com Inc.'s (NSDQ:AMZN) 'Echo' and the accompanying 'Alexa' voice assistant. The other major launches include two new 'Pixel' smartphones which will compete with Apple's iPhones and Samsung's flagships. In a recent investor note, Jefferies analysts also point out the release of a new Chromecast device and the launch of Andromeda, an OS which will merge Chrome with Android. Quoting from the Jefferies note:
On Oct 4 Google is expected to unveil a slew of new devices designed to showcase and drive usage of its best-in-class software services. Among the expected announcements: two new flagship smartphones designed to directly compete with the iPhone, a strategically important Bluetooth speaker that responds to voice commands, a new Chromecast audio / video streaming device, and a new OS called Andromeda, which will merge Chrome with Android.
While HTC is reportedly the 'Pixel' manufacturer, there have been reports of Google looking to manufacture its own smartphones in the near future.
Also read: How To Value Alphabet Inc Stock Today
Analysts Are Weighing In On Google Stock
A number of analysts have recently raised their ratings and price targets for Alphabet stock. The most notable ratings/hikes came from analysts at Jeffries and RBC capital. Jefferies analysts reiterated their $1000 price target and a 'Buy' rating, citing expansion of earnings multiple (PE ratio) driven by success in Hardware. In a separate news on Friday, RBC analyst Mark Mahaney raised his target on Alphabet stock to $1025, up from $1000, while maintaining an 'Outperform' rating. The leading internet analyst highlighted Youtube's $10B revenue run rate with a 30%-40% growth.
The 1-year analyst consensus price target for Alphabet stock is currently $938.55 with an average 'Buy' rating. The consensus price target implies an upside of 17.2% upside from the last closing price on October 3. Wall Street is clearly bullish on Alphabet stock with 46 out of 49 analysts rating the stock a 'Buy' or 'Strong Buy' while only 3 maintain the stock at a 'Hold' rating.
Could Twitter Be the Social Angle Alphabet Lacks?
A lot has recently been written about the potential takeover of Twitter (NYSE:TWTR) by Alphabet, with a significant coverage by fellow authors on Amigobulls. Hence, while we will not go over all the details once again, there has been a new development worth mentioning. Pee media reports, Alphabet Inc. has hired Lazard Bank to conduct a feasibility study of the Twitter acquisition. While there is yet to be any official confirmation, this could be a major step if a Twitter acquisition does play out, as rumored.
A point worth noting is the impact of Ruth Porat on Alphabet profitability. Alphabet hired their current CFO in March 2015. Given the cost discipline Porat has brought in at Google, the impact is clearly in the rising profit margins. Google's TTM (Trailing Twelve Month) operating margin is at 26.2%, up from 25% a year ago. While it does not mean much at a first glance, a 120bps improvement could translate into incremental earnings of nearly a Billion dollars given the scale at which Alphabet Inc. operates. Porat and the financial discipline is definitely something Twitter could leverage. (Hint: See their income statement to understand.)
Alphabet Inc. Outlook and Stock Valuation
Alphabet stock currently trades at a 19.7X multiple based on FY17 EPS consensus. With 5 year EPS growth forecasted at 18.1%, the stock currently trades at PEG (P/E by growth) ratio (TTM) of 1.08. The stock has traded at an average PEG ratio of 1.9, over the last 5 years, with a one-year range of 3.24 - 1.11, which implies room for significant multiple expansion over the coming quarters. A $1000 price target implies an earnings multiple of 24.6x FY17 estimates, putting the PEG ratio at 1.36, which while not very attractive, is well within Google's historic valuation range. Given the multitude of new product launches with potential for new revenue streams (Google home, Pixel, Andromeda) and the strength in Youtube, the risk/reward is pretty much favorable for long-term investors. Hence, a $1000 price target, which does seem expensive, could be easily met, If Google's hardware launches do take off, as expected.