Easy As ABC: How To Trade Alphabet Using Options

  • Alphabet is a strong contender in the tech space, with several growth opportunities available to them
  • They are rapidly expanding their artificial intelligence and cloud platforms, while maintaining focus on their core competency, the search engine.
  • They have strong financials, with positive cash flows and continued revenue growth
  • They are an expensive stock to trade, but there are ways to implement bullish strategies using options to avoid high capital costs

Let Me Google That For You

Alphabet (GOOG) is a staple in the tech industry, and they are constantly engaging in acquisitions and various growth opportunities. Their position isn’t going to be knocked away anytime soon, as they have exposure to almost every new development in the space, ranging from artificial intelligence to self-driving cars.

However, the digital world continues to evolve, and it is increasingly important that Alphabet stays on top of the trends. Search and ad revenue remains key drivers for the company, but other mediums for search, such as voice assistants like Amazon’s Alexa, pose a big risk.

GOOG is currently trading around $1,200 per share, below its 2018 high of $1,291.44. However, despite the lowered price, the $1,000+ price tag pushes a lot of consumers out of the market, especially those with small capital accounts. But Alphabet is a good buy, offering a combination of strong financials and an innovative business platform.

Alphabet operates through two different segments, Google and Other Bets. The Google segment covers Advertising, Android, Chrome, Google Cloud, Maps, Search, YouTube, and more. The Other Bets segment includes the outside businesses that the company operates in, such as Access, Calico, CapitalG, GV, Verily, Waymo, and X.

Source: CB Insights

Google: Search and Advertising Still Dominate

The Google segment is the biggest revenue driver for Alphabet. Other Bets are entirely experimental and are separate from Alphabet’s net income goals. Within their Google segment, Alphabet is putting a significant amount of resources into their Cloud Platform, Artificial Intelligence, and Advertising.

Within their advertising platform, the company has experienced an increase in Traffic Acquisition Costs, representing 23.09% of advertising revenues in 2018, a 1.89% increase from 2016 numbers. They experienced a large surge in acquisition costs to distribution partners, which has climbed almost 4% since 2016 to it’s current value of 13.19%. As mobile continues to grow in popularity, so will the TAC that Google carries. Maintaining relevance in the search and advertising space, despite the growing costs, is a top priority for the company, but the company is also devoting a large amount of resources to Cloud and Artificial Intelligence

Source: Google 10-K

Google Cloud: Third Place, But Not For Lack of Trying

Google Cloud offers Alphabet endless growth opportunities, as the power of the cloud is essentially untapped. Like Amazon and Microsoft, details about the cloud business are vague, but in their most recent earnings call, the company stated that they’ve “doubled the number of GCP contracts greater than $1M” with a “really nice uptick in the number of deals greater than $100M.” The cloud space is extremely competitive, as I discussed in my Microsoft article, and GoogleCloud is persistently in third place behind Microsoft Azure and Amazon AWS.

Source: ZDNet

Google had aggressive capital expenditures for 2018, outspending both Amazon and Microsoft with a $25.5B total for the year. That was 2.25x more than Amazon and 1.6x more than Microsoft. The CAPEX number was obviously for more than just cloud services, but the company has made it clear that the cloud unit is a priority for them, with the CEO saying that “the most sizeable (hiring) increases were in cloud, for both technical and sales roles“.

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Disclaimer: These views are not investment advice, and should not be interpreted as such. These views are my own, and do not represent my employer. Trading has risk. Big risk. Make sure that you can ...

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