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Embrace the Long View and Buy Alphabet Stock

Chris Markoch

Alphabet’s (NASDAQ:GOOGL, NASADQ:GOOGL) stock has been on a roller coaster since plunging in December of 2018. Despite the sell-off, Alphabet stock climbed to an all-time high of $1,296.97 in late April … only to fall back when the company posted a miss on first-quarter earnings.

Embrace the Long View and Buy Alphabet Stock

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While the stock got a small lift after reporting a second-quarter earnings beat, it has since fallen back. Right now, the stock is off close to 10% from its 2019 high.

Analysts also have conflicting views of the stock’s future price target. While some believe the stock will rise close to $1,400, others have a more modest target of $1,225, an increase of just over 4% from current levels.

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What Is Going On in Mountain View?

One issue troubling investors is GOOGL’s profit margins. Second-quarter revenue from Google Properties which includes ad revenue from Gmail, Google Play and YouTube, was up 18%. However, the company is using these revenues to fund their large investments in cloud computing, YouTube, and the company’s many ventures into artificial intelligence.

But there is no panic inside the company. Chief Financial Officer Ruth Porat has the company on firm financial footing, including doubling Alphabet’s capital budget. While this does not mean the company is planning on being a dividend darling anytime soon, the company has plans to buy back $25 million of stock. That will help take a bit of the risk off.

A more nebulous concern is the possibility of added regulation. As privacy concerns escalate, the U.S. Department of Justice is looking at possible restructuring of Alphabet’s internet search and advertising business. While such a step would set up a prolonged legal battle, if the company saw declining advertising revenue it might be a drag on the company’s otherwise healthy financial position. Still, there is no panic inside the company. CEO Sundar Pichai is referring to congressional scrutiny with a “what, me worry?” attitude.

For the foreseeable future, the company should be able to expect to generate industry-leading ad revenue. But the company’s future growth will be coming from its long-term initiatives in artificial intelligence. Three of their most recognizable AI initiatives are in the areas of mobile assistants, healthcare and driverless cars.

Alphabet Stock’s AI Initiatives

Google Assistant is a lynchpin for Alphabet’s AI initiatives. The AI system is part of Google Assistant’s mobile operating system and subsequently, the company’s smart home devices. And Alphabet is now integrating Google Assistant as a key feature of its Nest smart-home speakers and devices.

In the healthcare space, DeepMind and Verily are two of Alphabet’s ventures. DeepMind, which Alphabet purchased in 2015, uses algorithms to analyze anonymous data from the Department of Veteran Affairs to help predict if a patient could have dangerous kidney damage. Verily is using AI to help doctors in India diagnose diabetic retinopathy and to teach surgical robots to learn from past operations and improve how they conduct new ones.

Meanwhile, just 18 months ago, Alphabet’s self-driving car company, Waymo, was projected by some analysts to have a valuation between $75 billion and $125 billion. Since then, expectations for autonomous vehicles have slowed and Alphabet may be looking to license its autonomous vehicle technology.

Still, there is no indication that Alphabet will be abandoning this space. Annual global autonomous vehicle sales are expected to reach 33 million vehicles by the year 2040, with the value of the global market projected to climb to $7 trillion in 2050.

This High Flyer Is Coming Down to Earth

With everything going on, it’s hard to recommend Alphabet in the short term. Investors who are expecting the company to continue on its meteoric pace are likely expecting too much.

But if you believe, as I do, that Alphabet is more of a long-term play, there are many reasons to like the stock and the company. For starters, the company is still going to be generating a significant amount of ad revenue, which will help fund other areas of the business.

And even then, if I were just counting on ad revenue, I might be a skeptic. However investors know that Alphabet is the “moonshot” part of a company that is both the parent and the child of Google. Alphabet’s long-term future is in artificial intelligence. While there is no guarantee that all of their AI initiatives will pan out, the company is hedging their AI bets across a number of platforms. If I had to bet, I would say that Alphabet will have the resources that will make them an important player in the artificial intelligence arena.

As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.

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