Wednesday, October 20, 2021

Alphabet: Can FAANG Stock Continue its Run?

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(C) Reuters. Alphabet: Can FAANG Stock Continue its Run?

Alphabet (NASDAQ:GOOGL) has been leading the basket of FAANG stocks higher of late.

I am bullish on Alphabet, as it continues to impress the Street with robust strength across the board. At 30.4 times trailing earnings, shares of GOOGL are not severely overvalued from a historical valuation perspective.

Compared to some of the frothier, unprofitable tech names out there, Alphabet may still be a relative bargain, even as the broader market shows signs of weakness. (See GOOGL stock charts on TipRanks)

Alphabet Continues Firing on all Cylinders

Alphabet has left COVID-19 pressures behind, with the 2020 advertising slowdown now in the rearview mirror. For the second quarter, Alphabet clocked in an incredible 62% in top-line growth, and EPS growth of 169.1%. These are unprecedented growth numbers for a company with a market cap closing in on $2 trillion.

Undoubtedly, Alphabet’s stellar quarter has been against highly favourable year-over-year comparables. Still, the company has shown signs that it’s able to continue to grow in spite of its age.

It’s not just a dominant online advertising business anymore. The company has made significant strides in the cloud and is arguably one of the leaders in AI (artificial intelligence), given its unmatched wealth of data.

Other bets, such as Alphabet’s self-driving car endeavor Waymo, or its cloud gaming offering, Stadia, should also not go unnoticed.

Although they haven’t been impactful to the company’s incredible growth, they could evolve into something special over the course of the next decade.

Alphabet’s Other Bets

Indeed, ever since Google became Alphabet, it’s become more than just a search company, though search and online ads continue to comprise a vast majority of the firm’s revenues.

While it’s tough to say which one of Alphabet’s next bets will pay off, investors are essentially getting such businesses at a hefty discount at these valuations. Few other firms can funnel in such incredible sums of cash into innovative bets, after all.

Alphabet’s cloud-gaming platform, Google Stadia, has been met with mixed success. The video-game console “in the ground” effectively brings down the barriers to entry into console (or computer) gaming. While the technology is quite impressive, the game lineup has been quite lacking.

The company previously announced that it will no longer develop first-party games on its platform. Some took the move as a sign that Stadia’s ambitious future was in jeopardy. While first-party games are important to many gamers, I don’t think Stadia’s pivot marks the beginning of its demise.

With the semi shortage, next-generation consoles are hard to come by. If Stadia were able to win over the business of a big-league publisher, Google could take Stadia to the next level. Indeed, Microsoft (NASDAQ:MSFT) and its gaming push have been the envy of the tech industry. At this juncture, Google is at a crossroads, and it looks like Stadia is a write-off, with its director now gone for Google Cloud.

Whether we’re talking about Google Plus or Google Glass, it’s clear that many Alphabet’s side projects don’t amount to much.

Some projects are just poor uses of cash. In any case, it would be unwise to rule out an innovation that could pay dividends in the future. Whether it be Waymo, Stadia — both of which have had recent setbacks — or something that’s not on our radars, Alphabet has shown that it can still spend on such bets without having a severe negative impact on its stock.

For now, Google’s ad business is likely to lead it, and the FAANG cohort, much higher.

Wall Street’s Take

According to TipRanks’ consensus analyst rating, GOOGL stock comes in as a Strong Buy. Out of 29 analyst ratings, there are 28 Buys, and one Hold.

The average GOOGL price target is $3,198.86. Analyst price targets range from a low of $3,000 per share to a high of $3,600 per share.

Disclosure: Joey Frenette doesn’t own shares of any mentioned companies at the time of publication.

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