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3 Reasons Why Alphabet Stock Is Still a Solid Buy

Tom Taulli

From Twitter (NYSE:TWTR), President Donald Trump took another shot at Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) stock yesterday as well as CEO Sundar Pichai, writing: “We are watching Google very closely!” Trump’s main beef is with anti-conservative bias.

Alphabet is Making Up for Google's Lost Cloud Decade

Source: Shutterstock

Despite all this, Wall Street imposed little impact. Note that the GOOGL stock price was up about 1.4%. This probably had more to do with the overall rally in the markets than something specifically related to Alphabet stock.

Now, this is not to imply that the company is without regulatory problems. GOOGL faces actions in Europe. Moreover, the Justice Department is investigating the company for antitrust behaviors.

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Yet such matters often take much time to play out. It also helps that Alphabet has enormous resources to fight prolonged legal battles.

In the meantime, I think Alphabet stock does look interesting. Let’s see why:

Strong Growth Narrative Supports Alphabet Stock

Once a company gets to a large scale, it becomes extremely difficult to keep up the growth. It’s all about the so-called “law of large numbers.”

But for GOOGL, the company has been able to find ways to avoid this predicament. Just look at the latest quarter. Revenues jumped by 19% to $38.9 million and profits came to $9.2 billion.

This is certainly a testament to the underlying strength of the core search business as well as the massive platforms like YouTube, Android, Gmail, Maps, Chrome, Photos and Play. But the company has also been investing in new categories, such as cloud computing. In fact, this could ultimately become one of the largest revenue streams (the annual run-rate is $8 billion). GOOGL has not only been ramping research and development, but is also getting more aggressive with mergers and acquisitions, such as the recent $2.6 billion deal for Looker.

Finally, the company has a huge war chest of $121 billion to continue to invest and strike deals.

Valuation Favors GOOGL Stock

During the past 12 months, the performance of the GOOGL stock price has been far from inspiring. Consider that the return was a loss of nearly 7%.

But I think this is an opportunity, especially for those looking for a value-play in the digital space. After all, the forward price-to-earnings multiple is 23.6-times. That’s a reasonable ratio given the growth rate and the dominant positions GOOGL has in critical markets.

What’s more, management is looking to focus more on shareholder value. To this end, the company recently has announced a buyback of Alphabet stock worth $25 billion.

Artificial Intelligence Is a Game-Changer

Among the mega tech operators like Microsoft (NASDAQ:MSFT), Facebook (NASDAQ:FB) and Apple (NASDAQ:AAPL), GOOGL was one of the early players in the artificial intelligence space. A big reason is that the company needed to find ways to better manage the huge amount of search data.

The result was that GOOGL developed its own AI platform, called TensorFlow (which the company has since open sourced). It also made various acquisitions and hired top-notch academics (with a focus on deep learning).

Of course, GOOGL is a pioneer of autonomous driving, having been a key part of the early DARPA projects. The company has since developed its own division, called Waymo, which has become dominant in the industry (the cars have logged more than 10 million miles on public highways). The LIDAR systems are state-of-the-art and there is a ride-sharing system in Phoenix.

And then there is Alphabet’s DeepMind business, which is a trailblazer of AI. For example, the company recently developed a model, with the help of the Department of Veterans Affairs, that has been shown to predict potentially fatal kidney problems within 48 hours.

In terms of the market opportunity for AI, it is enormous. According to Tractica, the revenues are expected to go from $9.5 billion in 2018 to a whopping $118.6 billion by 2025.

Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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