The stock of Google parent company Alphabet is considered ”incredibly attractive” as market participants are undervaluing the potential of its other initiatives including artificial intelligence, according to a fund manager at Schroders.
Google has been making investments in various areas such as life sciences, artificial intelligence, and autonomous vehicles. When the firm was reorganized as Alphabet, the company break out revenues and operating losses for these other initiatives in its quarterly financial results.
Schroders global sector specialist for tech and telecoms Mr. James Gautrey crunched the numbers over the valuation and earnings forecasts on Alphabet. The analyst figured out that the market was bearish on the potential of the other bets of Google.
The Schroders specialist stated, “We know that they are investing about $1 billion a quarter in what they call other bets. So these are the areas that don’t really produce any revenue for them, these include their moonshots.”
“So $4 billion a year, which as you said the market puts the stock is on forward P/E (price-to-earnings) of 20 times,” Gautrey further added.
According to him, “Now the core business is growing 25 percent a year in constant currencies, so the market is ascribing absolutely no value at all, in fact it’s probably negative – twenty times on minus four billion a year is minus $80 billion and that’s a hell of a bet the market is taking that Google is going to fail in all of these things and I suspect that one or two of them are going to prove to be pretty big, so I think the shares are incredibly attractive.”
He also stated that the market consensus for the net profit of Alphabet for the following year clocks in at $23 billion. This includes losses of approximately $3- $4 billion for the other investments of the company. With this, the core search business division of the corporation gains about $27 billion and if you apply 20 times forward P/E ratio of 20 times for the next year, it would result in a value of $540 billion.
When you add a net cash of $60 billion to that figure, the equity value would amount to around $600 billion.
The analyst further stated: “With a market cap of just $540 billion, the market is effectively valuing other bets at negative $60 billion. And that is crazy given the potential in these divisions.”
“One could also argue the 20 times multiple on the core is too low given its dominant position and resource. Increasing the multiple would just make the other bets even more negative,” he said.
Looking at the daily chart of the stock above, you will see that GOOGL shares continue to trade above the support line denoted by the blue line. As long as it doesn’t break down below the trendline, we can anticipate that the company’s stock will continue to edge higher.