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Why Alphabet Inc shares look a buy for intelligent investors

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This morning Google’s parent, Alphabet Inc. (GOOGL) reported a net profit of $9.19 billion on revenue of $40.5 billion for the quarter ending September 30 2019. This translated into earnings per share of $10.12 versus $13.06 over the prior corresponding quarter (pcq). 

Advertising revenues climbed to $33.92 billion versus US$28.95 billion in the pcq to help lift the overall top line 22% on a constant currency basis.

The strong top-line growth is impressive given the scale of the business with the Google search engine and YouTube formidable growth assets that offer investors plenty more upside. 

ther growing businesses that many investors will use every day include Google Maps, Gmail, Google Cloud and Google Drive

During this morning’s call it flagged National Australia Bank Ltd (ASX: NAB) as a major new client for the Google cloud business. 

Google’s ‘other revenues’ segment including Google Cloud and hardware (i.e. pixel phones, nest speakers, pixel bud headphones to come, etc) grew its top line from $4.64 billion to $6.24 billion.

This is impressive growth with its hardware business able to leverage the best of Google’s software and AI going forward. 

Alphabet is also investing heavily in new technologies in the quantum computing, healthcare, and self-driving spaces among many others. Its Waymo self-driving car business continues to develop, with ‘drone deliveries’ of parcels also active in the U.S.

Verily its healthcare business is also a major health-tech player in the U.S. and has a research partnership with ResMed Inc. (ASX: RMD) for example. The partnership is designed in part to sort clinical data to show how preventative medical treatments can save the public sector higher patient costs further down the treatment line. 

Financials

At quarter end Alphabet had an incredible $121 billion cash on hand. Or around $16 for every person in the world. 

When you consider it just printed a $7 billion quarterly profit with capex of $6.7 billion invested you can see that its scary profitability, reinvestment, and financial strength mean stock in this digital monster is a buy in my opinion.

At the end of the day share prices will follow earnings per share higher or lower over the medium term and I expect Alphabet’s EPS is going higher in part due to the buy-back alone.

This is not rocket science and the kicker is that the valuation on around 23x analysts’ average forecasts for fiscal 2020’s earnings is reasonable given the company’s strength. 

Moreover when you compare this valuation to some of the eye-watering valuations assigned to local tech or digital businesses such as WiseTech Global Ltd (ASX: WTC), SEEK Limited (ASX: SEK) or AfterPay Touch Group Ltd (ASX: APT) you can see the value on offer. 

Where to invest $1,000 right now

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*Returns as of June 30th

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Tom Richardson owns shares of AFTERPAY T FPO, Dicker Data Limited, ResMed Inc., SEEK Limited, and WiseTech Global.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares). The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO and WiseTech Global. The Motley Fool Australia owns shares of and has recommended Dicker Data Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Alphabet (A shares), ResMed Inc., and SEEK Limited. 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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