- Alphabet had an excellent year in 2015 with increased revenue, earnings, and a 45% stock price appreciation.
- In 2016, the company will have many massive projects running in parallel, and some will potentially impact the stock price.
- What are the top focus areas for Alphabet in 2016 that will tip the scale between a successful and unsuccessful year?
The recently ended 2015 was tremendously successful for Alphabet Inc-C (NASDAQ:GOOG) shareholders, who benefitted from a 45% yearly return on their investment, one of the most impressive years for the technology conglomerate. In 2015, the company continued expanding its Android OS ecosystem with new dedicated versions for VR, in-vehicles entertainment units, and smartwatches, while launching the new generation Nexus phone, new paid YouTube services, and the Alphabet re-organization, among other developments.
As shown in the chart below, Alphabet’s shareholders (in both stock classes C and A) enjoyed an impressive return of 45% in 2015, partly thanks to the Alphabet re-organization and partly thanks to convincing financial results that beat analysts’ expectations with flying colors. However, with the rocky start to the year and concerns of a global slowdown, could Google outperform in 2016?
Of course, I don’t have a magic crystal ball to answer that, but there are some focus areas that I believe Google could concentrate on and potentially expand the stock price rally into 2016. The first focus area for 2016 is successful penetration into the augmented and virtual reality markets with Google Glass (aka Google Aura) gen2 and Android VR. Virtual and augmented reality is expected to be one of the hottest tech trends of 2016, with the virtual reality market led by Facebook's (NASDAQ:FB) Oculus, and the augmented reality market led by Google and Microsoft (NASDAQ:MSFT) Hololense. Apart from Oculus, many VR headsets manufacturers are set to release their devices next year, including HTC, Sony Corp (NYSE:SNE), Samsung Electronics (OTC:SSNLF), Lenovo, etc., which will create an opportunity for Google to expand its Android ecosystem into this new consumer electronic segment. There are rumors that Android-enabled VR goggles will be released next year, but nothing is official yet. Successful penetration into this emerging market could drive substantial revenues for Google in the future. On the augmented reality market, a lot has already been said and written; a successful adoption rate for the product and a variety of smart glass choices could create a long-term revenue stream and boost Alphabet stock price.
The second focus area for 2016 is YouTube monetization and social services. Alphabet’s best social offering is YouTube, which started to unbundle services into dedicated paid subscription–based services that could unlock additional potential from YouTube and strengthen YouTube's positioning within the Alphabet conglomerate, which might drive a possible spin-off in a few years' time. As YouTube is currently Alphabet’s best (some will say only) social service, it is important for Alphabet to grow additional services like the reported instant messaging that could later be leveraged into P2P payment transactions and other emerging revenue streams.
The third focus area for 2016 is self-driving car progress and in-car entertainment unit penetration. While Alphabet’s autonomous car will not be launched in 2016, many look at it as Alphabet’s biggest bet for future revenue and as such, it should deliver spotless progress this year following the Ford Motor (NYSE:F) partnership and the expected joint-venture announcement in CES. Alphabet is competing with Apple (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA) to introduce the first fully autonomous car and capture most of the segment share in this emerging market. Investors expect that Google will lead that market and wait for additional positive developments. Even though this initiative has a very long-term target, it will be a major focus area for investors in 2016.
The fourth focus area for 2016 is enterprise software and IaaS market. Amazon (NASDAQ:AMZN) Web Services (AWS) has been controlling the IaaS market for many years and recently even launched additional tools like data analytics, data visualization, and rapid data migration tool to increase its gap from the competition. To stay in the game and maintain a stable revenue stream, Alphabet needs to invest further in the enterprise software and IaaS market, probably through acquisitions of leading pure-play companies like Splunk (NASDAQ:SPLK) and Qlik Technologies (NASDAQ:QLIK).
Obviously, Alphabet has many balls in the air and many projects that seem significant and innovative – however, they do not have the same potential impact on the company’s stock. The four focus areas above will, in my eyes, have the biggest impact on Alphabet stock price in 2016 and could tip the scale between a successful or unsuccessful year. This will, however, be alongside many smaller focus areas that I did not mention above like maintaining stable core business revenue, increasing the smartwatch OS market share, increasing Chromebook sales, etc.