Technology Alphabet Stock Can Rally To $2,000

02:15  03 october  2019
02:15  03 october  2019 Source:   investorplace.com

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Once the most beloved growth stocks in the market, FANG stocks have been under tremendous pressure recently, with one notable exception: Alphabet (GOOG, GOOGL). Specifically, relative to their 2019 highs, shares of Facebook (FB), Amazon (AMZN) and Netflix (NFLX) are all off 15% or more. Google stock, meanwhile, is just 6% off its 2019 highs.

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Why the relative resilience in Google stock amid a broader FANG massacre? Because of all the FANG stocks, GOOGL stock offers investors the most bang for their buck. So as momentum stocks have been torched over the past month, GOOGL stock has been largely unscathed.

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Relative to its large-cap, growth tech peers, Google stock is pretty cheap considering its robust growth prospects over the next few years. Thus, while investors have been questioning the valuations underlying many other growth tech stocks recently, they haven’t questioned the valuation underlying GOOGL stock. This lack of questioning largely explains Google stock’s relative resiliency.

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Indeed, the stock is so cheap and the growth prospects so healthy, that the fundamentals say GOOGL stock should sprint towards $2,000 by 2024 — a near 70% rally over the next five years.

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Here’s how that happens.

A Basis for Steady, Double-Digit Growth

When it comes to Google stock, the next five years will be centered around digital ads and the cloud.

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Alphabet right now is essentially two big businesses, with a bunch of small businesses. Those two big businesses are the company’s digital ad business, including Google Search and YouTube, and the company’s Google Cloud business. Together, those two big businesses provide a solid foundation for sustained double-digit revenue growth over the next several years.

On the digital ad side, Google is the world’s biggest player in a double-digit growth market, and will remain so for the foreseeable future. Google Search is the backbone of the internet. Usage won’t drop anytime soon. Neither will ad dollars flowing through the network. At the same time, YouTube is the largest streaming video platform in the world at a time when video is one of the biggest consumption trends out there. Consequently, YouTube usage will remain robust for a lot longer, so ad dollars will keep flowing into the platform.

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On the cloud side, Google Cloud is the third biggest player in the secular growth infrastructure-as-a-service cloud market. Only one-fifth of enterprise workloads globally have shifted to the cloud. Thus, this market grow for a long time. It is also a highly concentrated market, with the five biggest players controlling the lion’s share.

Thus, over the next several years as the markets maintains double-digit growth, Google Cloud should similarly grow at a healthy double-digit pace.

Between the digital ad and cloud businesses, Alphabet projects as a double-digit revenue grower for the next five years.

Multiple Catalysts Could Drive Revenue Upside

While the big digital ad and cloud businesses will power double-digit revenue growth at Alphabet over the next few years, all the other small businesses could combine to drive revenue growth rates up towards 15%, or higher.

Those small businesses are as follows:

  • YouTube TV, which could take off in the event that fully cordless becomes the norm in the 2020s.
  • Waymo, which appears to be just a few years away from generating billions of dollars in self-driving related revenue.
  • Stadia, which could overtake Xbox and Playstation as the new de facto gaming console.
  • Google Shopping, which has huge potential in the secular growth e-commerce market.
  • PlayPass, which could become a meaningful revenue contributor if the mobile gaming market becomes subscription focused.
  • Wing, which could also become a meaningful revenue contributor if drone delivery gains mainstream traction.
  • Pixel, which could see huge adoption uptake if iPhone fatigue ever kicks in.

Some of these efforts will pan out. Some won’t. But, the ones that do should combine to help Alphabet maintain a 10%-15% revenue growth rate over the next five years.

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Google Stock Could Hit $2,000

Assuming Alphabet does grow revenues at a 10%-15% rate over the next few years, then the company will be looking at $350 billion in revenues by fiscal 2025.

Margins should move higher into fiscal 2025, mostly because the worst of the mobile ad pricing headwind is in the rear-view mirror and traffic acquisition costs are moderating. Also, scale in the cloud business is driving enhanced profitability, and this dynamic should persist. This double tailwind should help Alphabet’s profit margins inch higher over the next few years.

Assuming so, Alphabet could easily net around $100 in earnings per share by fiscal 2025. Based on a historical growth stock average 20-times forward earnings multiple, that implies a fiscal 2024 price target for Google stock of $2,000. Discounted back by 10% per year, that equates to a 2019 price target of roughly $1,250.

Bottom Line on GOOGL Stock

Google stock has been impressively resilient during the recent momentum/growth stock selloff. This resilience is a byproduct of the stock’s undervaluation relative to its growth peers. Zooming out, this relative undervaluation creates runway for the stock to hit $2,000 by 2024.

The implication? GOOGL stock is a good buy here, and is worth holding onto for the long run.

As of this writing, Luke Lango was long GOOG, FB, AMZN and NFLX.

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