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By JEFF REEVES
Self-driving cars are here. Brick-and-mortar retail is being obliterated by e-commerce. And from a market perspective, tech stocks represent one-fifth of the S&P 500’s value.
Of course, separating the tech sector’s hype from real investment potential is no easy task. The future is unpredictable, and the present can be unforgiving to companies lacking a wide moat or deep pockets to weather a downturn.
That’s why I like Alphabet Inc. so much — this company is the perfect mix of short- and long-term potential.
Here’s why Alphabet stock is a good bet for your portfolio now, into 2017 and well into the future.
3 short-term reasons to like Alphabet
In fiscal 2015, 90% of Alphabet’s top-line came from its Google ad biz — $67.4 billion of $75 billion in revenue, to be precise. So while there’s a lot going on at the tech giant, it’s crucial for investors to first analyze Alphabet based on its current business. And in short, that business is looking quite good.
2. Valuation: Alphabet currently trades at about 19 times forward earnings. That may sound a bit rich, but it’s actually a slight discount to Alphabet’s typical valuation. Furthermore, when you consider that some no-growth utility stocks are trading for forward earnings multiples above 20, and the entire S&P 500 is trading at a forward P/E north of 18, that doesn’t seem like much of a premium for consistent growth.
3. Momentum: At the end of July, Alphabet’s 15-day moving average pushed through its 50-day moving average. In August, the stock’s 50-day trendline pushed through the longer-term 200-day moving average. The result was a quick double-digit gain for the shares, but then the tech giant lost momentum in anticipation of the upcoming Federal Open Market Committee meeting. Alphabet shares still hover around their 52-week high, and could be poised for another breakout once the dust surrounding the Fed settles.
3 long-term reasons to like Alphabet
Of course, no high-growth tech company can keep up its act forever. There comes a time when firms must evolve, either because of new opportunities or outside influences.
With roughly $85 billion in cash and investments and $25 billion or so in operating cash flow, Alphabet clearly has the means to finance its next chapter. But beyond deep pockets, the company’s current strategy shows a great understanding of where its market is headed and how to find new business opportunities in the 21st century economy.
1. YouTube Red: Streaming video has been a big part of Alphabet since the 2006 acquisition of YouTube for $1.65 billion. And with a new offering known as YouTube Red, the company is set to move beyond ad-supported content into subscription streaming in a big way. Red launched at the end of 2015 without much fanfare, but already seems to be gaining steam with a 3% share of the pay TV market, according to research firm Digitalsmiths. That tops the share of efforts such as Sling TV from Dish Network Corp. and is a clear sign that this $9.99 monthly service is more than just an also-ran.
2. Sanofi team-up: In other efforts to move beyond media, Alphabet subsidiary Google Life Sciences recently joined forces with French pharmaceutical giant Sanofi S.A. on a diabetes treatment program.
Unlike some other pie-in-the-sky Silicon Valley schemes, this partnership is particularly interesting given Google’s clear analytics expertise and the massive market potential of some 30 million Americans with diabetes who require regular monitoring of their blood sugar. It’s one thing to toy with technologies like self-driving cars or virtual reality that seem a long way from widespread adoption, but frankly, this is a more practical and realistic effort that may pay off in the next few years instead of the next few decades.
3. Cloud growth: While Amazon.com Inc.’s Amazon Web Services gets a lot of the attention around cloud computing, Alphabet is no slouch in this department. At the end of 2015, Alphabet hired VMware Inc. VMW, +0.51% co-founder Diane Greene to run its cloud business arm, and that clear focus on enterprise opportunities has continued in 2016. Case in point: Alphabet has spent more than $1 billion in acquisitions related to the cloud over the past year or so, including purchasing Orbitera in August and Apigee in September. True, Alphabet lags rivals like Microsoft Corp. but the total addressable market is huge, and Alphabet has the deep pockets and wherewithal to compete long-term.