- Google continues to launch new applications to innovate and acquire new revenue streams.
- EU antitrust charges on android are a major concern, which may affect the stock price in the short term.
- Valuation shows some mixed signs - Alphabet Inc. stock appears to be relatively inexpensive but may also not be a bargain.
In this article, we will assess the pending EU antitrust charges on android as a major concern. Alphabet Inc. (NASDAQ:GOOGL) stock price closed at $814.96 per share on Friday, 23rd September 2016, having made an impressive one-year rally, up from $638.37 per share on September 30th 2015. While the stock price has pulled back to $802.79 (October 4 close price), an important question is whether this rally is sustainable and if yes, what are the price levels to watch out for?
Google Launches New Products/Applications
Alphabet Inc (NASDAQ:GOOG) recently launched a slew of new hardware products including the Pixel phone, Daydream VR headset, etc... This follows the recent launch of a new application to make travel planning and organizing easier, called Google trips. The travel industry is a very large business and apparently, Google wants to find new sources of revenue. But Google is also investing capital and exploiting alternative sources of revenues in many other industries and business sectors, from the health sector and pharmaceuticals, to autonomous vehicles technology and new ventures in startup companies. Investing capital in research and development has both a positive and a negative effect. While exploring new business ideas, technologies, marketing opportunities can provide significant income and boost profitability, there can also be significant delays with respect to returns on the capital invested, with uncertain financial results.
Startups carry a lot of risks, and returns may come only after many years, while capital committed is also significant and immediate. According to recent news, Alphabet was recently reported to be an interested buyer of 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 it can make a profit utilizing Twitter as a business advertising platform when Twitter itself couldn't be profitable during the last few years?
EU Antitrust Charges for Android Continue to Be a Major Concern
Google has to soon face claims by the European Union that the company favored its own Android platform and browsers, restricting competitors' access to advertising and other mobile services. Google has a dominant position with its Android operating system, and if the European Union decides that Google did indeed breach antitrust and competition laws, a potentially large fine of approximately $7.4 billion could be imposed on Google, which will have at least a short-term negative impact on Alphabet stock price.
Alphabet Valuation Shows Mixed Signs
Google has been able to produce five consecutive fiscal years of increasing net income and earnings per share. But the results have been mixed in the recent quarters, as the company missed expectations in three of the last five quarterly earnings releases. 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 five-year trend. Earnings per share growth for next 3-5 years is estimated to be 15.77%, which is not unrealistic.
What about the value of Alphabet Inc. stock relative to its Sector, Technology and its Industry, Internet Information Providers? Alphabet Inc. has a trailing twelve months P/E ratio of 30.5, 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 its sector and industry. P/B ratio for the 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 as well as its sector.
Comparing Alphabet Inc. with its major peers Baidu (NASDAQ:BIDU), Yandex (NASDAQ:YNDX), Yahoo (NASDAQ:YHOO) and Microsoft (NASDAQ:MSFT) on a relative valuation, we notice that Alphabet Inc.'s PE ratio is only lower than that of Yandex. P/BV for Alphabet Inc. is only higher than that of Yahoo Inc. and P/S ratio for Alphabet Inc. is higher compared to all its peers with the exception of Yahoo Inc., which has the same ratio of 7.34. If we add Facebook Inc. (NASDAQ:FB) to the comparative analysis, Alphabet Inc. has all the mentioned ratios lower than Facebook.
Taking a quick look at the technical analysis of Alphabet stock, the stock is trending upwards with the current price above the 50 day and 200 day simple moving averages. There is resistance at the 52 week high of $819.06 per share. We think at current levels Alphabet Inc. stock is a hold, mainly due to the recent rally of the stock. Adding positions in the price range of $780-$790 per share with a 12-month upside of 10% puts the target price for the stock at a range of $890-$900 per share.
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