The Alphabet Inc (GOOG) Stock Growth Story Ain’t Over

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In a recent post , I suggested that social media juggernaut Facebook Inc (NASDAQ: FB ) was a better investment bet than Alphabet Inc (NASDAQ: GOOG , NASDAQ: GOOGL ). The link between the two is that they collectively dominate the mobile ad spending market. However, GOOG stock is no slouch when it comes to its own investment appeal.

Source: Brionv via Wikimedia (Modified)

And, in a number of respects, it represents a more diversified bet on the continued growth in digital ad spending and the network effect of any firm that operates primarily online. Despite the naysayers, Alphabet stock's economic moat is arguably strong and defensible.

Alphabet Stock and Google's Recent Sales Trends

In late October, GOOG reported very solid third quarter results. Revenue grew 20%, and an even more robust 23% when backing out foreign exchange fluctuations (a strong U.S. Dollar makes international results look less strong). Management singled out mobile search (the Google website) and video (YouTube) for helping drive its "core advertising business."

Total sales reached $22.5 billion, more than half of which stem from outside the United States. Nearly 90% of total sales stem from the Google websites. GOOG makes money on its websites where advertisers pay when a web surfer clicks on one of its ads.

The other segment, which it lumps into 'Other Revenue', made up the remaining 10% and consists of sales from its Google Play store, Chromecast, cloud storage and the Google Pixel phone that was recently released.

The other segment also includes an 'Other Bets' division that doesn't account for much sales or profit, but has the Nest, Google Fiber, life sciences division and other "moonshot" initiatives such as a self-driving car. Yet some speculate it consumes a rather high proportion of research and development costs (up to 40% of total R&D) and could come out with a new product or technology that changes the world (and subsequently the overall success of Alphabet stock).

The Profit Picture and Outlook

Third-quarter profits jumped 27% to $5.1 billion and represented a very impressive profit margin of almost 23% given the heavy spending in Other Bets.

For the full year, analysts expect total net income of $34.44 per share on sales growth of 19% for GOOG stock. Total sales could reach $90 billion and exceed $100 billion by the end of 2017.

Alphabet stock's cash flow generation is one of its most appealing investment characteristics. Year-to-date free cash flow (through Sept. 30) was approximately $19.5 billion. It came in at more than $21 per share last year, or about the same as reported profits. This level of cash generation speaks to how successful and profitable the firm is.

GOOG's Appeal

Alphabet has an enduring economic moat given its dominance in internet search. It also controls at least half of the software that drives mobile phone devices through its Android franchise. Android goes head-to-head with Apple Inc. 's (NASDAQ: AAPL ) iOS that powers its iPhones. Consumers are likely to only increase their use of the internet and will increasingly use their mobile devices to do so.

GOOG points out that billions of people have yet to be able to access the internet on a consistent basis. Online capabilities help people shop, open businesses and network with other individuals.

Its digital dominance has not gone unnoticed. European regulators are trying hard to wrest away Google's search dominance - it has a market share upwards of 90% in a number of countries in Europe. But this also speaks to just how influential the company is. European (and other) regulators tried to take the wind out of the sales of Microsoft Corporation (NASDAQ: MSFT ) several years ago, but the company arguably remains as dominant as ever.

Bottom Line on GOOG Stock

Back when I compared Facebook stock to Alphabet stock, I mentioned that Alphabet trades at a slightly lower forward price-to-earnings multiple - 19x compared to Facebook's 23x - but that it is growing more slowly that Facebook.

But, the overall extent of the growth for GOOG stock is about as strong as you are going to find for a large-cap company. Facebook's revenue is only about a quarter the size of Alphabet, but its advertising revenue centers primarily around its own website and mobile application.

Neither company is a steal at the current share prices, or valuations. Both must grow cash flow at at least 20% for the next decade or so to justify where the share prices trade currently.

But it doesn't take too many years of 25% to 30% growth to more quickly move forward. Alphabet's user base is literally every human with an internet connection. GOOG stock will benefit as more people use the internet and businesses increasingly migrate online. If rapid growth such as this continues, Alphabet stock is significantly undervalued.

Of course a rival could come along and steal significant market share, but that doesn't seem likely any time soon. Less likely is that one of its moonshot initiatives in the Other Bets segment takes off, but the possibility does exist. Finally, growth will slow one day for GOOG stock, but that will only increase the likelihood of a robust and growing dividend payout.

As of this writing, Ryan Fuhrmann was long shares of Facebook, but did not hold a position in of the other aforementioned securities.

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The post The Alphabet Inc (GOOG) Stock Growth Story Ain't Over appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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