A More Streamlined Google Stock (GOOG)
Alphabet Inc (NASDAQ:GOOG) is reportedly trying to sell one of its satellite divisions, a business that it bought in 2014 for $500.0 million. This sale would suggest Alphabet’s upper management is getting serious about cost-cutting, and that they are willing to do the dirty work needed to ensure a bright future for Google stock (GOOG).
A competing satellite-imagery firm named Planet Labs Inc. wants to take the business off Alphabet’s hands, but it is still a small startup.
The hope is that it can raise enough money to complete a “cash plus equity deal,” which would suggest that Alphabet will retain some stake in the enterprise even after selling it. (Source: “Google in Talks to Sell Its Satellite Business,” The Wall Street Journal, January 10, 2017.)
But the important point to remember is that any associated costs will get wiped off the company’s income statement. That is a really big deal for Google stock, not because this satellite business was terrible or anything, but because it shows commitment to shareholder value.
For as long as I can remember, Google has thrown money around without a second thought. To be fair, its monopoly over the search engine market was so absolute that it could afford to do that. As the online advertising business grew bigger, GOOG stock continued to rise.
This was the basic equation that propelled Google stock over the last decade and a half.
The internet behemoth managed to stay atop the tech world by playing the odds. It would invest in a bunch of interesting new technologies with the hopes that one or two of them would eventually become a product. That’s how “Android,” “Maps,” and the “Chromecast” came into existence.
But now it’s time for a little belt-tightening. In order to keep Google stock moving “up and to the right” there needs to be more money-makers and fewer science projects. If you take a close look at what Alphabet has been doing over the last year, it’s pretty clear that it’s making the right moves.
For instance, it spun the driverless car project into a full-fledged business called “Waymo” (yes, I know it’s a terrible name, but it could be a golden goose) and unveiled a fleet of self-driving minivans. (Source: “A first look at our Waymo fully self-driving Chrysler Pacifica Hybrid minivans,” Medium, December 18, 2016.)
Since Waymo isn’t manufacturing the cars, but simply licensing the technology to carmakers like Fiat Chrysler Automobiles NV (NYSE:FCAU) or Toyota Motor Corp (ADR) (NYSE:TM), it could become a profit center much sooner than other firms in the same industry.
We’re talking billions of dollars here. Put that in perspective with the imminent sale of Alphabet’s satellite-imagery business. What you’ll see is a company that is focused, a company that is slashing unnecessary costs and cranking up its earning potential.
From a fundamentals perspective, this would suggest that Google stock is grossly underrated. We expect the share price to explode this year, particularly in the third and fourth quarters.