I last wrote about Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) May 1 just after the company reported an earnings miss. Down more than 8% on the news, I recommended investors buy Google stock despite the miss.
Heading into next week’s second-quarter earnings call, I thought I’d revisit some of the seven reasons I gave for buying GOOGL stock.
Analysts aren’t expecting much from Alphabet, but that doesn’t mean you shouldn’t consider buying Alphabet stock at current prices. Here’s why.
Analysts Still Like Google Stock
Although analysts grew less confident about Alphabet after its first-quarter results — eight cut the Google target price on the news — 34 still have a buy rating, with three giving it an overweight rating and only six a hold. None have a sell rating on Google stock.
The target price? $1,335.22 is the average with a high of $1,500 and a low of $1,150. At the average target price, investors are looking at 16% upside over the next 12 months.
I don’t know about you, but I’d take a 16% annual return every day of the week and twice on Sundays.
Analysts might have lowered their target prices, but when 86% of investors have a buy or overweight rating on its stock, there must be something good about the company.
Google Cloud Continues to Grow
As I wrote back in May, Google’s cloud operation is playing catch-up with both Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) when it comes to the cloud. Can it catch the two market leaders? Probably not, but it’s trying hard to keep up.
On July 11, Alphabet announced that it hired Kirsten Kliphouse as Google Cloud’s head of North American sales, a newly created position, to enable it to go after small, medium, and enterprise customers.
Google Cloud CEO Thomas Kurian has been busy filling out the division’s sales team so that it can better compete against Amazon and Microsoft. In addition to hiring Kliphouse, Kurian also announced that he brought over Eduardo Lopez as head of Latin American sales, also a newly created position. Lopez and Kurian worked together for 20 years at Oracle (NASDAQ:ORCL) before Kurian left in 2018 to head up Google Cloud.
In addition to making plenty of hires, Alphabet is also making a few acquisitions.
In the past three months it has bought Looker, a data analytics firm, for $2.6 billion. Google also made a smaller acquisition of cloud storage company Elastifile and moved cybersecurity firm Chronicle into Google Cloud from outside Alphabet.
“Kirsten and Eduardo are inspirational business leaders who will ensure we continue to build strong relationships with users, including HSBC, UPS, Whirlpool and many others, ” Rob Enslin, president of global customer operations for Google Cloud, told CNBC in an email. “Their expertise in running multi-billion dollar sales organizations and managing large teams will be invaluable as we focus on accelerating our growth.”
Although Google’s search business generates the lion’s share of the company’s revenues, these latest moves should help it grow other parts of its business, especially the cloud.
GOOG Stock’s Massive Free Cash Flow
In the trailing 12 months, Alphabet generated $25.5 billion in free cash flow. Given its current enterprise value is $690.1 billion, Alphabet stock currently has a free cash flow yield of 3.7%, which suggests that it’s fairly valued at the moment.
However, any time a business can generate 15 cents of free cash flow from every dollar of sales as Google does, it’s not nearly as worrisome when sales growth slows to 17%, as is expected by analysts in the second quarter.
Since 2016, Alphabet’s free cash flow has been above $20 billion, which allows it to make more significant investments in all of its various businesses.
Capital allocation continues to be a big reason why Google stock will continue to move higher. With Ruth Porat as CFO, you can be sure that the money will continue to be spent wisely. Financially, Alphabet has never been stronger.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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