They’re out of favour right now with the markets but let’s not forget about Big Tech and the FAANG stocks, what with their growth rates still outshining most other companies and their command over whole industries still strong. And if you had to choose one name among that down-and-out group, pick Alphabet (Alphabet Stock Quote, Charts, News, Analysts, Financials NASDAQ:GOOGL), says portfolio manager Bruce Murray, who argues there’s a multitude of reasons to be buying the stock.
“Alphabet is an extremely high-class company. They still have an incredible growth rate in revenue and we think it’s going to be about 15 per cent per annum over the next few years and the earnings are going to be higher than that, probably at 18 to 20 per cent,” said Murray, CEO of The Murray Wealth Group, who nominated Alphabet as one of his Top Picks for the next 12 months on a segment on BNN Bloomberg on Monday.
Alphabet was on an incredible run over 2020 and 2021, where the stock doubled from about $1,500 pre-pandemic to just under $3,000 by mid-November of this past year. But that time period, as everyone knows, was in hindsight a clear turning point for the market, as investors began a general rotation away from growth names like the FAANGs and tech stocks more broadly and towards more defensive and value plays in the market.
Rising interest rates and a pandemic hangover have been singled out as reasons for the pullback on Big Tech, which did very well during COVID and its associated lockdowns but has been hit hard more recently. How hard?
So far, Alphabet has been less affected than some other names in the space, with its share price now off about 20 per cent from its highs. That compares to a 45 per cent drop for Meta Platforms (Meta Stock Quote, Charts, News, Analysts, Financials NASDAQ:FB) a 30 per cent drop for Amazon (Amazon Stock Quote, Charts, News, Analysts, Financials NASDAQ:AMZN) and a big 70 per cent cratering of Netflix (Netflix Stock Quote, Charts, News, Analysts, Financials NASDAQ:NFLX).
At the other end of the spectrum, Apple (Apple Stock Quote, Charts, News, Analysts, Financials NASDAQ:AAPL) is down by just 12 per cent and FAANG-relative Microsoft (Microsoft Stock Quote, Charts, News, Analysts, Financials NASDAQ:MSFT) is down about 15 per cent.
On Alphabet, Murray says investors should be thinking about the company’s share buyback program along with its huge investments in research and development.
“It’s selling at about 22.5x earnings, and it’s going to buy back $70 billion worth of stock over the next 12 months, which is about five per cent of the market cap,” Murray said.
“And the Google Cloud business is number three behind AWS and Microsoft and it’s growing nicely and is very profitable,” he said. “Advertising revenue, we believe will hold in, and they’re spending about $30 billion on R&D. They’ve got divisions like Waymo that are huge and that aren’t even valued in the stock.”
“And so, we think of the FAANG stocks, let’s go with Google. It’s of the highest class, it has the least outside influences and it’s got great opportunities,” Murray said.
Alphabet’s stock fell about six per cent following its latest earnings release in late April, as the company missed analysts’ consensus estimates for top and bottom numbers for its first quarter 2022. Alphabet reported a 23 per cent growth rate in revenue to $68.01 billion, net income of $16.44 billion compared to $17.93 billion a year earlier and diluted EPS of $24.62 per share compared to $26.29 a year earlier. Analysts had been calling for revenue of $68.11 billion and EPS of $25.91 per share. (All figures in US dollars.)
YouTube advertising revenue was down, with many pointing to the tough comparisons with last year’s numbers achieved in the middle of the pandemic when more eyeballs were seeking out the video platform. At the same time, Google Search grew its revenue from $31.88 billion to $39.62 billion and the company’s Cloud business also ramped up from $4.04 billion to $5.82 billion.
“Q1 saw strong growth in Search and Cloud, in particular, which are both helping people and businesses as the digital transformation continues. We’ll keep investing in great products and services, and creating opportunities for partners and local communities around the world,” said CEO of Alphabet and Google, Sundar Pichai in a press release.
First quarter revenue from Alphabet’s Other Bets segment, which includes the company’s venture capital businesses and the self-driving car Waymo, saw revenue rise from $198 million to $440 million while sporting a loss of $1.15 billion.
“We continue to make considered investments in Capex, R&D and talent to support long-term value creation for all stakeholders,” said CFO Ruth Porat in a press release.