Image Source: Pixabay

Alphabet (GOOGL) makes a lot of headlines because of consumer complaints, antitrust issues, and general ill will toward mega-companies, suggests Rich Moroney, editor of Dow Theory Forecasts.

We could devote a full page to this company every week just to keep up with the developments. But today, we’re going to forget all the outside forces and focus on five reasons to buy this Focus List stock.

1) Accessibility

While a stock’s price shouldn’t matter in a market where most stock trades cost nothing, the company’s high price drove away many investors and kept the company off price-weighted indices like the Dow Industrials. After a 20-for-1 split in July, these shares became more approachable.

2) Big Ideas

So far, Alphabet’s “Other Bets” unit hasn’t contributed much to the bottom line. Critics have long questioned the company’s heavy investment in venture-level projects ranging from autonomous driving to drone delivery, from quantum computing to health-care, and life-sciences ventures they rarely discuss.

Alphabet refers to these non-core businesses as moonshots, an apt description for big ideas with an equally large chance of imploding. Still, the information economy turns clever concepts into cold cash every day.

3) Consistency

Since going public in 2004, Alphabet has averaged annual sales growth of 31%, never dipping below 8% for a calendar year. Per-share profits also rose every year, delivering average growth of 32%.

Remember all that criticism the company received for posting negative profit growth for a couple quarters in 2020? Those transient declines stood out because of Alphabet’s history.

4) Diversity

Google takes some heat because of its dependence on digital advertising, which still accounts for 81% of its revenue and pretty much all of its profits. But Alphabet has parlayed its size into strong positions in a variety of other businesses, such as mobile operating systems, cloud computing, data analytics, artificial intelligence, and virtual reality.

Over time, those faster-growing businesses should account for a higher percentage of company sales. The cloud business, once a tiny sliver of the company, now accounts for about 9% of revenue. Given an annual growth rate in the 30% range, cloud’s share of revenue should remain on the rise.

5) Expectations

Analysts expect Alphabet’s per-share profits to fall this year, and estimates for this year and the next two years have declined in recent weeks. However, the recent profit-growth targets of 15% in 2023 and 16% in 2024 seem low, assuming a return to a more typical business environment.

We’ll close with an area where Alphabet has rarely distinguished itself. V is for valuation. Down 30% so far this year, the stock has recently traded at 18.5 times trailing earnings, in line with the median for internet-media companies.

Alphabet’s trailing P/E is 35% below its three-year norm of 28 and 40% below its 10-year norm of 31. The stock earns a Quadrix Value score of 64, well above the average of 42 for interactive-media companies and a record high for Alphabet.

About the Author

Richard Moroney, CFA, is the editor of Dow Theory Forecasts and the Upside newsletter; the vice president of research for Horizon Publishing Company; and vice president and portfolio manager of Horizon Investment Services, a money management company. He is the inventor of the proprietary Quadrix® stock-rating system.

Called "An Intellectual Heir to Charles Dow" by his peers and the press, Mr. Moroney is sought out for his accurate forecasts on the market and specific stocks by major news organizations and business groups.

He has appeared on CNN, CNBC, and Sky Radio and is often quoted in Barron's, Investor's Business Daily, SmartMoney, Business Week, The Washington Post, The Chicago Tribune, and the Chicago Sun Times. Mr. Moroney holds an MBA in finance from the University of Chicago.

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