3 Reasons Alphabet Stock Is a Must-Buy on Recent Pullback
I wouldn’t recommend ignoring Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) for too long. This is a high-quality company with strong growth, immense profitability and plenty of potential going forward. Despite strong earnings in late July, Alphabet stock has had trouble moving higher.
We’ll get to the charts in a bit, but so far, GOOGL stock is about $100 per share off its highs. That’s giving investors a chance to nibble Alphabet stock if they had taken profits or passed on the stock in the past. After such a big, multi-year rally, it’s hard to say this is the all-in buy signal we’ve been waiting for. After all, we’re less than 8% off the highs.
However, for interested bulls, there are three reasons (at least) to consider buying Alphabet stock.
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Valuing Alphabet Stock
Let’s go right off the bat: GOOGL stock trades at 29.5 times this year’s earnings estimates. That’s far from cheap in the minds of most investors. After all, they can buy Microsoft (NASDAQ:MSFT) at 26 times earnings, even as it hits new all-time highs right now. Plus, MSFT pays a dividend.
Investors who pass on GOOGL because of valuation though, also pass on superior growth. Analysts expect 23% earnings growth this year and another 21% growth in 2019. If that weren’t impressive enough, forecasts call for 23.7% and 19.5% revenue growth in 2018 and 2019, respectively.
The company’s main business — Google — has become a verb at this point, one that’s officially recognized. Once that has happened — think Kleenex for tissues or Band-Aid for bandages — it usually means the company has established a pretty deep moat.
It goes beyond search though. While it may be true that many U.S. consumers find Apple (NASDAQ:AAPL) iPhones most attractive, don’t forget how big Android is, which operates nearly 80% of global smartphones. Alphabet has also become a major player in the cloud space as well, sitting just behind Microsoft and Amazon (NASDAQ:AMZN) in terms of market share.
The fact is, Alphabet stock isn’t just a tech stock, it’s a blue-chip tech giant worthy of a premium valuation. Along with the fact that it’s expected to grow earnings and revenue in excess of 20% this year and next year helps justify that valuation as well.
The Future of Alphabet
Alphabet’s current business continues to hum along. Growth is good and the management team is strong. But what about the future of Alphabet stock? That looks promising too.
I continue to argue that the cloud industry still has plenty of runway. As demand for data continues to grow (and it will), as pictures become higher quality and as files become larger, we need more and more storage.
The cloud not only solves those questions, but makes running a business easier as well. It increases productivity, communication and convenience. As corporations start to fuse A.I. with the cloud, it will only become more efficient. That’s why companies like GOOGL still have plenty of upside with the segment.
However, transportation could become a big unit for Alphabet, as it has Waymo. Waymo is not only working on creating a robo-taxi service for consumers, but also autonomous trucking solutions for logistics. It has set up a subsidiary in China and is looking to make the leap to Europe as well.
While Waymo still seems in its infancy, it’s a major leader in the autonomous driving movement. Morgan Stanley recently assigned Waymo a valuation of $175 billion. RBC analysts used various models for Waymo, with one resulting in an enterprise value of $180 billion. UBS went with a $135 billion valuation.
These figures are rising rapidly as more and more analysts realize what role Waymo could play in the trillion-dollar transportation industry. We don’t know how it will pan out yet, but the signs are promising right now.
Trading GOOGL Stock
So that leaves GOOGL stock. We can consider its current growth and future business as catalysts to owning the stock, but can we consider the charts a third reason? Given that it’s up 12.5% this year, 25% over the past 12 months and more than 80% over the past three years, I think we can.
Shares are consolidating around the 100-day moving average. Because GOOGL stock is about 8% off the highs and this area is showing some support, I feel comfortable buying Alphabet stock, even if it’s a small purchase.
I would be interested in adding to the position near $1,140, while more conservative investors may wait until a test of the 200-day. My must-buy level remains at $1,000, a spot where we were fortunate enough to load up in April.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, he was long GOOGL.
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