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Why I’d buy Alphabet Inc (Google) before Commonwealth Bank of Australia (ASX:CBA) shares

The price of technology giant’s Alphabet Inc Class A (Google) shares jumped to a record high of US$1,287 overnight before closing the session at US$1,285. The stock has continued its bullish run following the release of the company’s Q2 earnings report on Monday.

For Australian based investors, an investment in a blue chip of Alphabet’s calibre can provide an alternative to the banking heavy Australian market where the big 4 banks of Commonwealth Bank of Australia (ASX:CBA), Westpac Banking Corp (ASX:WBC), Australia and New Zealand Banking Group (ASX:ANZ) and National Australia Bank Ltd (ASX:NAB) comprise 20% of the All Ords Index.

Australia’s banking sector is facing a number of problems with an increase in funding costs, a cooling property market and consequences from the Banking Royal Commission.

These issues should prompt investors to consider investing in other companies operating in different industries with more attractive growth prospects such as Alphabet.

Another strong quarter

Despite investor concerns about decelerating growth, Alphabet exceeded the market’s expectations with revenues increasing by 26% on the prior corresponding period to US$32.66 billion (up 23% at constant currency).

Excluding the US$5.07 billion fine levied by the European Commission for contractual provisions between Google and its Android partners contravening European competition law, operating income rose 15% with earnings per share (EPS) climbing 32% to US$11.75. The quarterly result beat consensus expectations of US$32.13 billion in revenue and EPS of US$9.54.

However, it should be noted that the headline EPS number includes the unrealized and realized gains and losses on equity security investments following a change in accounting standards effective from 1 January 2018. This number will fluctuate periodically with the latest quarter generating a gain of US$1.06 billion and an EPS impact of $1.17.

Other Revenues and Other Bets

Whilst 86% of Alphabet’s core revenues are derived from its advertising business via platforms such as Search and YouTube, the company’s other revenues which includes cloud services, hardware and app sales rose 37% to US$4.43 billion for the quarter.

Furthermore, Alphabet is also investing heavily into other projects that could deliver significant future earnings growth if successful. These projects fall under the company’s “Other Bets” division that includes the self-driving car unit Waymo, healthcare and disease prevention unit Verily, and drone delivery unit Project Wing among others. For Q2, the Other Bets division saw revenues increase by 49% to US$145 million and it posted an operating loss of US$732 million.

Foolish takeaway

Alphabet is far from cheap with the stock currently trading for around 26 times forward earnings. However, the current valuation multiple is not overly expensive when considering the growth rate of the underlying business and its future prospects. For Australian based investors, Alphabet can provide a solid alternative blue chip investment to the type found on the local market with the additional risk of foreign exchange.

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Motley Fool contributor Tim Katavic owns shares of Alphabet (A shares). 

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares). The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Alphabet (A shares). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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