Alphabet Inc: Why Google Stock Is Still the Best Bet in the Internet Industry

This Is a Big Deal for GOOG StockThis Is a Big Deal for GOOG Stock

Mega-cap companies don’t usually offer startup-like growth. That’s why Alphabet Inc (NASDAQ:GOOG) stock is so special. After a solid earnings report, Google stock gained more than four percent. Google’s Class A shares have surged past the $800.00 mark.

Expectations were already high before Google stock earnings, yet the company managed to beat both top- and bottom-line estimates. The best part is that despite being the incumbent in the Internet industry, Google’s growth rate was no less than its competitors. In the second quarter of 2016, Google’s total revenue surged 21% year-over-year to $21.5 billion.

Here are three reasons why the momentum in GOOG stock is not going to stop anytime soon:

1. Other Bets (Including Google’s Driverless Car)

Last year, Google changed the company’s structure to separate core Google business from its “Other Bets.” These other bets include driverless cars, “Google Fiber,” “Verily” (formerly Google Life Sciences), and “Nest” smart thermostats.

So far, these bets seem to be going fine for the Internet giant. In the second quarter, revenue from Other Bets increased 150% year-over-year from $74.0 million to $185 million. Due to increased expenses, however, operating loss from the segment widened from $660 million in the year-ago period to $859 million.

Of course, not every project in Other Bets is guaranteed to work, but one of them has a quite promising future—autonomous cars.

Driverless cars are expected to change the entire transportation industry in the near future, and almost every automaker and many tech giants are in the race. Alphabet is currently testing its autonomous driving systems in Mountain View, California; Austin, Texas; Kirkland, Washington; and Phoenix. Google’s driverless cars have self-driven more than 1.6 million miles.

Why would Google succeed in this highly competitive future industry? Well, its approach is quite different from most others. While many automakers are fitting advanced driver assistance systems into their vehicles, Google is going after fully autonomous cars. Its in-house two-seat driverless car doesn’t even come with a steering wheel.

According to Alphabet’s chief financial officer, Ruth Porat, “We’re focused on fully-autonomous cars because in early testing we saw the risk of depending on drivers to remain engaged once you give them the option to switch off.” (Source: “Alphabet Q2 2015 Results – Earnings Call Transcript,” Seeking Alpha, July 28, 2016.)

2. Improving Financials

Today, many Internet companies carry extremely high price-to-earnings (P/E) multiples because investors believe they will generate huge amounts of profit once they become mature companies. Google, on the other hand, is already established. In most places on Earth, it dwarfs its competitors—if there are any at all. Yet, its monetization is still improving.

In the second quarter of 2016, Google’s advertising revenue improved 19% year-over-year to $19.1 billion. Aggregate paid clicks increased 29% year-over-year, while paid clicks on Google web sites surged 37% from the year-ago period. This kind of growth in monetization is impressive for a company with a more than $500-billion market cap.

3. Reasonable Valuations

At the end of the day, keep in mind that despite being the second-largest company in the world by market cap, Google stock isn’t really that expensive. Trading at $776.81 apiece on Friday morning, GOOG stock has a P/E multiple of 31.61X. Moreover, if you use projected 2017 earnings, you’d see that the search engine giant has a forward P/E of just 19.65X. These kinds of multiples are much lower compared to most of its peers in the Internet business.

With improving monetization of its core products, reasonable valuations, and huge potential from its Other Bets segment, Google stock is worth taking a serious look for investors interested in the Internet industry.