Here’s Why I’m Bullish on GOOGL Stock
Shares of Alphabet Inc. (NASDAQ:GOOG, GOOGL) have delivered massive gains for investors since the company’s initial public offering (IPO). Yet despite the big run, GOOGL stock still offers the potential to deliver outsized profits for shareholders.
Since 2004, shares of the online search giant are up by nearly 1,300%, comfortably beating the NASDAQ index and its 191% gain over the same period. Following such a rally, it’s only natural to think the company’s best days might be behind it. But for shareholders willing to dig a little deeper into the story, there’re still a number of catalysts that could drive GOOGL stock in the years ahead.
Let me show you three things that Mr. Market seems to have forgotten when it comes to Google stock’s value:
Mr. Market Forgot About Google’s Moat
Warren Buffett is often asked, “What is the most important trait you look for in a business?” Again and again his answer is always the same: an economic moat. Some sort of competitive advantage that allows a business to earn excess returns for stockholder year after year.
Google has built a moat around its business more than a mile wide. The more searches Google receives, the more information the company collects. The more information Google collects, the better the search results the company can return. The better the search results Google can return, the more searches the company receives. It’s a virtuous circle that ensures Alphabet should be able to crank out oversized profits for years to come.
Mr. Market Forgot About GOOGL Stock Buybacks
Alphabet is a cash flow machine. During the past 12 months, the company generated over $71.2 billion in revenue. Much of that translated directly to the bottom line, with free cash flow coming in at nearly $14.5 billion.
Google makes so much money, it literally doesn’t know what to do with it. Today, Alphabet is sitting on $69.8 billion in cash and short-term investments and that total is growing by the day. This will likely translate into more GOOGL stock buybacks and maybe even a dividend in the years ahead.
Mr. Market Forgot About Google’s Growth
The exceptional profitability of Alphabet’s search engine means GOOGL stock deserves to trade at a premium, and it certainly does. Today, Google stock trades for around 35 times the company’s trailing-12-month GAAP earnings. This is a fair price for this business.
However, stockholders fail to appreciate the potential of Alphabet’s laboratory of “moonshot initiatives,” which may or may not have a material impact on earnings in the years ahead. At the company’s headquarters in Mountain View, California, Alphabet is working on a series of exciting projects from self-driving cars to virtual reality headsets. Investors get all of the potential upside from these innovations for essentially nothing.
Bottom line, Alphabet is changing the world. That’s why I’m not betting against GOOGL stock.