Alphabet Inc: Machine Learning a Strong Catalyst for GOOG Stock

Alphabet IncThis Could Send GOOG Stock Soaring

Alphabet Inc (NASDAQ:GOOG) is the world’s second-most valuable company, with approximately $538.21 billion in market capitalization. Google created Alphabet last year as its parent holding company, under a new operating structure to focus on its consolidated businesses and increase management scale.

As Larry Page explained in a blog post last year, “Alphabet is about businesses prospering through strong leaders and independence.” In other words, the CEOs running its businesses have strong management and leadership skills to drive growth and profitability. Alphabet’s biggest business is Google, which is now headed by Sundar Pichai. (Source: “2015 Founders’ Letter, 2015,” Alphabet Investor Relations, last accessed August 5, 2016.)

Over the years, Google has been profitable and its revenue has been growing under the leadership of its founders, Larry Page and Sergey Brin. There is no doubt that their decision to create Alphabet with a new operating structure will help make Google and its other businesses more successful.

Alphabet has a strong financial and stock performance. Investing in GOOG stock means you are investing in a quality business that offers positive returns over the long term.

Here are some of the reasons for my conviction…

Alphabet’s Growth Rate Is Impressive

Last week, Alphabet reported adjusted earnings of $8.42 per share in the second quarter, up from $6.99 per share in the year-ago period. The company’s earnings were higher than the $8.04 per share Wall Street analysts expected. (Source: “Alphabet Announces Second Quarter 2016 Results,” Alphabet Investor Relations, July 28, 2016.)

Google’s revenue increased 21% to $21.5 billion, up from $17.65 billion in the same period last year. Alphabet also beat the $20.76 billion in revenue analysts expected.

The company reported that its revenue from Google increased from $17.65 billion to $21.32 billion, while its revenue from its “Other Bets” segment increased from $74.0 million to $185 million. Other Bets includes businesses and projects such as “Calico,” “Google Fiber,” “Google Ventures,” “Nest,” “Verily,” and “X.”

Alphabet’s second-quarter results showed that it is growing continuously at impressive growth rates.

GOOG Stock Forecasted to Reach $1,000 Per Share

Alphabet’s strong financial performance drove GOOG stock higher by more than four percent over the past five days since July 28, when the company released its second-quarter results.

Over the past 12 months, GOOG stock traded between $565.05 per share and $789.87 per share—gaining more than 23%. Obviously, the stock is going up steadily, which supports the perception that Google investors could continue to reap good returns from this investment.

Cantor Fitzgerald analyst Youssef Squali gave the most bullish prediction for the stock based on its recent quarterly performance. According to him, GOOG stock has the potential to reach $1,000 per share, an increase of approximately 23% from its trading price of $773.18 per share as of Wednesday, August 3.

In a note to investors, Squali recommended a “Buy” rating on Google stock. He explained that his recommendation was based on Alphabet’s strong quarterly results, particularly the company’s sustainable double-digit growth in its core search business and strong growth in display driven by YouTube/Programmatic. He also noted Alphabet’s disciplined cost allocation across Google and Other Bets and its compelling valuations relative to growth prospects.

Potential Industry Disruptors: Delivery Drones and Self-Driving Cars

Alphabet’s Other Bets such as “Project Wing” (delivery drones) and self-driving cars are not yet making money but they are expected to disrupt their respective industries.

The White House Office of Science and Technology Policy (OSTP) announced new steps to promote the safe integration and innovative adoption of unmanned aircraft systems (UAS), or drones, across the country. According to the White House, Alphabet will start testing its delivery drones at one of the six FAA-sanctioned drone test sites to set the foundation for future approvals. (Source: “Harnessing the Potential of Unmanned Aircraft Systems Technology,” White House, August 2, 2016.)

In January, Project Wing head Dave Vos said drone delivery in urban areas in the United States might be possible within a few years. (Source: “Google Exec Says Delivery by Drone Possible Within a Few Years,” Bloomberg, January 11, 2016.)

Obtaining approval to operate its delivery drones would boost “Google Express,” which offers same-day and overnight delivery. The membership fee is $95.00 per year, slightly lower than an “Amazon Prime” membership.

When it comes to self-driving cars, Alphabet CFO Ruth Porat said the company’s tests already reached 1.6 million miles. The company is testing its self-driving cars in Mountainview, California; Austin, Texas; Kirkland, Washington; and Phoenix, Arizona.

In May, Google partnered with Fiat Chrysler Automobiles NV (NYSE:FCAU) to integrate its self-driving car technology into 100 “Pacifica” minivans. The partnership was intended to accelerate its autonomous car program.

In an interview with Bloomberg, IDC Research Officer Crawford Del Prete commented that there would be a real competition in self-driving cars in the future. Google’s move in developing a fully autonomous car is “massively disruptive,” not only in the auto industry but all of its ancillary parts. He thinks Google is making a huge and bold bet on self-driving cars that could offer a handsome payoff.

Machine Learning: An Engine That Drives Google’s Long-term Growth

Google CEO Sundar Pichai said the company’s advancement in machine learning is the engine that drives the company’s growth in its advertising business and other products and services today and it will continue to do so in the future.

With machine learning, the company has the unique opportunity to take big steps to generate more revenue from advertising, “Android,” YouTube, its search engine, and other businesses over the next 10 years.

Pichai also said Google is in the best position to take advantage on the shift to mobile because it can offer advertisers the best ways to reach customers. Right now, the company is already enjoying strong growth in three areas of its advertising business: mobile search, video, and programmatic.

The Bottom Line on GOOG Stock

Alphabet continues to develop new technologies, improve its products and services, and seek new opportunities for its businesses to ensure growth and profitability over the long term. In other words, the company will always be a leader in the technology industry and will have many catalysts to keep Google stock moving upward.