Can Alphabet, already the world’s most valuable firm, hit $1,000?

Share

There are almost too many data points to pull out of Alphabet Inc.'s fourth-quarter earnings report that might help explain the stock's subsequent rise to making it the most valuable public company in the world by market capitalization.

Revenue at the company formerly known as Google was higher than expected, rising 19 per cent year over year to $17.3-billion (U.S.); share earnings hit $8.67, beating consensus estimates of $8.08. Users are up, margins are up, key competitive categories (such as mobile ads) showed strength. When shares dropped below $500 in 2015, that was a steal. And there may be good reasons to invest now that the share price has come close to $800.

Neil Doshi of Mizuho Securities seems to be the top mega-bull on Alphabet, offering a price target of $1,070 for the stock. His reasons seem fairly unsubtle: "Core Google's non-GAAP operating margin (on net revenue) was 47 per cent in [the fourth quarter], up 320 basis points year over year. On top of that, total company revenue accelerated to 24-per-cent [year-over-year] growth in [the fourth quarter], which is the strongest growth we've seen since 2012. This goes to show that core Google's biz remains vibrant and healthy as ever."

Mark Mahaney at Royal Bank of Canada's investment arm wasn't far behind with a $1,000 target. "The market has wanted four things from GOOGL: consistent revenue growth, margin stabilization, greater disclosure and cash back," he wrote. "[Alphabet] is now overdelivering. … We believe it is placing the right bets on its core, adjacency, and moonshot assets." At least 27 analysts had raised targets by midday.

Alphabet changed its structure and its name so that it could break out all the side businesses that were not its core Google ad, search, video, app and device businesses. The "Other Bets" – formerly called moonshots – cost the company $4.5-billion in 2015. It only reported revenue on its city Fiber program, the Nest smart home devices and Verily (life sciences tech) – which made a combined $448-million, up 37 per cent. Fiber is the most expensive bet. It accounted for the largest share of the $869-million in capital expenditures for the bunch. So far, self-driving cars, the incubation activities in X (such as the Project Loon balloons), and the life-extending research of Calico contribute no revenue.

"We're looking to push the frontier both within Google and Other Bets. So ongoing innovation is key to all that we're doing in Google, and it's benefiting users and the ecosystem broadly," said Google chief financial officer Ruth Porat. As a sign of how enormous the company's revenue is, Bloomberg calculated it took Alphabet only 17 days to earn back the $3.6-billion it lost on those "Other Bets."

In the nearer term, Alphabet is making headway in a segment of its business that had been an area of analyst concern in previous quarters: mobile ads.

The mobile segment was up 24 per cent year over year, driven by its programmatic business as well as its YouTube. In programmable, 60 per cent of the company's holiday shopping season clicks business came from mobile. In YouTube, the growth was largely in its skippable TrueView ads – even though the company doesn't record a skip as a "click."

"YouTube on mobile reach[es] more 18- to 49-year-olds than any cable network in the U.S.," Google chief executive officer, Sundar Pichai, told analysts. Alphabet also revealed that 80 per cent of YouTube's views come from outside the U.S.

Google's main rival in mobile is Facebook, and eMarketer analyst Debra Aho Williamson predicts Facebook will grab nearly one in every five mobile ad dollars in the U.S., to the point where 82 per cent of Facebook's U.S. ad revenue will be mobile in 2016. According to eMarketer, Google's piece of U.S. mobile ad dollars in 2015 was 32.9 per cent.

Alphabet can enjoy its moment at the top of the heap, but the view from up there can be fleeting. Apple has seen $200-billion disappear from its market cap in the past 12 months – largely a result of slowing iPhone sales growth. That would represent the erasure of a company the size of Wal-Mart Stores Inc. or Coca-Cola Co. It would seem that even at the very large cap level, dominance is temporary.