This article was written by Grant Goldstein, a Financial Analyst at I Know First

 

 

 

 

“If what we are doing as a company is not seen by some people as science fiction, it’s probably not transformative enough.”

-Sergey Brin

(Source: Pixabay)

Highlights

• Q1 Expenses Worry Stockholders
• Google’s Upcoming Product Line
• GOOGL Bullish Forecast By I Know First Algorithm

Alphabet Inc. (NASDAQ: GOOGL) is a holding company. Incorporated on July 23, 2015, the businesses under Alphabet include Google Inc. and its various internet products. The two segments are Google and Other Bets. Google is the company’s internet products and Other Bets is for the purpose of Internet and television services.

Alphabet’s Q1 2018

The tech giant had a remarkable Q1 2018. Revenue grew 26% to $31.1 billion, with mobile websites leading the way for the hike. Ad revenue grew 24% to $6.288 billion, a large chunk of total revenue. With that being said, there was growth in many sectors which led to the quarterly success, including cloud, hardware, and Play.

Gross profit margin decreased 6.4% to 56.76% and profit margin increased 27.4% to 30.18%. Retained earnings increased by 9.68%, a remarkable sign for the company’s profitability.

There was an increase of current assets by 13.76% to $123.76 billion. Current liabilities increased by 66.45% to $25.39 billion. With a current ratio of 4.87, Alphabet is surely financially healthy since they have more than $4 in current assets for every dollar of current liabilities.

Cost of revenue increased by 37% to $13.5 billion. The company attributes this mainly to the cost of data centers and content acquisitions. Operating expenses were up 27% to $10.7 billion. This was due to the huge increase in R&D as the company continues to invest in “technical talent”.

Alphabet’s Other Bets had revenue of $150 million, growing 53.3%, mostly thanks to Google Fiber and Verily. However, the operating loss was $571 million.

The company had outstanding earnings per diluted share at $13.33. This was an increase of $3.40 from last years and surpassed Zacks Consensus expectations by 7.82%. Zacks expects Q2 to have an EPS of $9.51.

Q1 saw some changes to their software and hardware. Google started to focus heavily on making YouTube a more family friendly place. To do this, they employed stricter rules and strengthened their machine system flagging to find videos that don’t align with YouTube’s policies. Also, Nest, the smart thermostat and home security company, is joining the Google Hardware team. The goal is to combine the two teams in order to advance Google Home. Alphabet changed their financial reporting practices which now showed the previously unreported financial results of Nest: revenue of $112 million and an operating loss of $284 million in 2017.

Stock price initially increased following earnings, but declined due to concerns of growing expenses.

GOOGL (Source: YCharts)

Technical Analysis

The 50 day and 200 day simple moving average (SMA) is below the price of GOOGL, a bullish indicator. Also, the 50 day SMA is above the 200 day SMA, a sign that stock price will continue to rise. The RSI is not above 70, stating that GOOGL is not overbought, yet not oversold.

SMA (Source: YCharts)

Examining the MACD for GOOGL, there are several bullish signals. On May 9th, the MACD experienced a bullish zero crossover, showing a positive trend for GOOGL. On July 12th, the MACD crossed over the signal, a signal line crossover, which is a recommendation to buy the stock.

MACD (Source: YCharts)

The ADX of GOOGL shows uncertainty for the momentum of the stock. The +DMI (green line) is above the -DMI (red line), which is a sign of an uptrend. However, the ADX value is below 25, at 15, which indicates that there is an absent or weak trend. So, the strength of the uptrend is very poor.

ADX (Source: Yahoo Finance)

The aroon oscillator value for GOOGL is 40. Since this number is above 0, it is demonstrating that the stock hits new highs more than it hits new lows, but since the number is rather low, it’s unable to determine if there is a strong trend. Also, since the aroon up is staying steadily at 100 while the aroon down is declining, this demonstrates that a strong trend may be continuing.

Aroon (Source: Yahoo Finance)

Looking at the on balance volume (OBV) for one month, the OBV increases when stock price increases. The rising OBV and with stock price shows that stockholders are willing to pay more for GOOGL, a sign that the GOOGL positive trend will continue.

OBV (Source: YCharts)

Valuation

Alphabet has a PE ratio (TTM) of 51.19, compared to the industries 34.87. Stockholders are paying more for GOOGL as they are anticipating earnings to be higher this upcoming quarter. Hence, there is a lot of demand for the stock.

PE Ratio (Source: YCharts)

The companies earning yield is at 1.95%. Currently, the U.S. 10 year Treasury note yields 2.831%. Since the earning yield is lower than the Treasury note, it’s a sign that GOOGL is overvalued.

Alphabet’s EV to EBITDA is 19.23, lower than the industry’s 22.42. Being that it’s below the industry’s average, it shows possible value for the stock.

Alphabets free cash flow for Q1 was $4.3 billion. This is lower than the companies average of $4.7 billion. However, Capital Expenditures increased by 191% this quarter, so the return on the investment has the potential to raise future stock price. The company stated in their earnings call that “we remain focused on investment to support long-term revenue and profit growth.” The company has a CF/CapEx of 1.6, which means their operations are efficiently bringing in enough cash to supply for its asset acquisitions.

Compared to Alphabets competitors, their free cash flow yield is quite low. For instance, the company has a free cash flow yield of 2.53%, while Facebook and Microsoft have 3.06% and 4.09%, respectively. So, there are companies in the industry that have better fundamental performance than Alphabet.

Valuation (Source: YCharts)

Alphabet News

Google is investing a total of $550 million into the Chinese online retailer JD.com. With Google obtaining a 1% stake in JD, the company is expanding their roots into China. Since Baidu is the number one search engine in China, it’s important that Alphabet finds a way into that vast and lucrative market. Also, obtaining data on what people shop for provides for more sought after advertisements. Since JD will now sell to Google Shopping, Google will be able to get much more personalized data for ads.

On July 9th, house lawmakers pressed Alphabet for information on how the company handles their users data. This comes after privacy concerns spawned from Facebook’s Cambridge Analytica scandal. In this letter, it accuses Android phones of collecting user location data for Google, even if the location services are disabled. This growing concern for data collection, especially from United States lawmakers, has the potential to significantly damage Google’s ad business; if data collection laws are put into place, Google’s ad revenue would take a substantial hit.

Alphabet is expected to be slapped with an antitrust fine by the European Union in the coming days. This case was announced back in 2016, accusing Google of allowing licensing conditions for Android OS that favored Google products and services over competitors. The fine is expected to be north of $2.8 billion. However, Google is not worried about that, but rather of the possible order that can allow phone manufactures to no longer bundle Google with the Android operating system, a detrimental loss since Android runs on 77% of the worlds phones. This would be a huge blow to their advertisement revenue, as data collection would significantly drop.

Upcoming Alphabet Products

At Google’s I/O event, new products were released that have the chance to revolutionize the world. One of the most interesting products to come out of this was to the advancements to Google Assistant. Google has programmed a virtual assistant to make phone calls on your behalf for reservations and appointments. The crazy part is that it sounds and acts exactly like a human being would (take a listen for yourself). This assistant would be added to phones and Google Home, which would be a feature that would probably give Google Home a greater market share over Amazon.

Alphabet has partnered with Jaguar Land Rover to create a self driving car. Through Waymo and the Jaguar I-Pace, Google will provide self driving mechanisms in a long term partnership between the two companies. Last Tuesday, RBC Capital gave a bullish forecast for GOOGL due to the strength of Waymo. Analysts believe that Waymo will lead self-driving cars, especially when it launches operations in Phoenix later this year.

Waymo (Source: Wikimedia)

Google News is upgrading its overlay to make it easier to access information. Users will now be able to subscribe to news sources, creating a better user experience. Also, Google will use machine learning to try to find the most reliable sources possible, eliminating false news stories from surfacing.

Rumors are starting to come out about a big gaming push by Google. The company is looking to create a brand new streaming service and even a console to compete against PlayStation and Xbox. The subscription service would allow users to access a number of games to play on their new console or their PC. A huge advantage of this is that it’s cloud gaming, so users’ hardware would not have to be so robust as files are offset to Google computers. This could be a huge win for Google as the new wave of consoles from PlayStation and Xbox are expected by 2020.

On July 11th, Alphabet split two of its research products into standalone companies; Loon and Wing will now be a part of Alphabet. Loon, which is included under Other Bets, uses balloons in the stratosphere to supply internet connection to rural areas. One way that this would benefit Alphabet is through the collection of data through this service. The other company, Wing, is tasked with delivering goods to people via drones. Perhaps this is why Google bought shares in JD, in order to implement their drone service to online shopping.

Loon (Source: Wikimedia)

Analyst Recommendations

NASDAQ recommendations consist of analysts from Morgan Stanley, JP Morgan, Bank of America Merrill Lynch, and more. Out of the 29 analysts, 25 give GOOGL a strong buy, with only one recommending selling.

Analyst Recommendation (Source: NASDAQ)

I Know First Bullish GOOGL Recommendation

On July 15, I Know First Algorithm gave a bullish 1 year forecast for GOOGL. The Algorithm assigned a signal of 117.05 and a predictability of 0.1. The Algorithm gave a weak predictability of 0.09 and a low signal of 29.65 for the 1 month time frame.

Conclusion

I have a bullish forecast for Alphabet’s long term. As evident, the company is really focused on their long term, which can be seen by their increase in capital expenditures and by statements in their earnings call. With that in mind, we already have a glance of what’s to come from Google I/O. If some of these products come to prominent fruition, especially Waymo, the company would be leaders in unmet markets. Currently the company has many low financial ratios compared to competitors. The PS and PE are higher than the industry’s, but I believe this is due to hype surrounding upcoming earnings. Despite some ratios, buying right now is a great idea as future growth will propel the company.

I am wary about the short term for a couple a reason. My technical analysis revealed mix results for the solidity of the uptrend. So, due to that, it’s hard to be certain the direction GOOGL will be heading in the coming days. Also, with the impending EU antitrust fine, stock price will sure slump from the negative press. One problem that many people see with stocks like Alphabet and Facebook is changes in laws that will affect their data collection. I believe the chances of laws passing is slim, but if they do, the companies would not be greatly affected as they will find new ways of collection.

I Know First Algorithm is in agreement with my bullish one year forecast.

Past I Know First Success with GOOGL

On June 10th, I Know First Algorithm gave a bullish one month for GOOGL. Since this forecast, the stock has returned 7.1%.

Current I Know First subscribers received this bullish GOOGL forecast on June 10, 2018.

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