(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of GOOGL.)
Alphabet Inc. (GOOGL, GOOG), parent of dominant search engine Google, posted a strong 2017 by rising about 35 percent, beating the S&P 500's return by a whopping 15 percentage points. The year 2018 may also be good to Alphabet investors even if the stock gets nothing more than multiple expansion. Over the past two years, Alphabet shares have seen peak one-year forward multiples of about 25 times earnings. Should that happen again in 2019, Alphabet could rise by another 14 percent to $1,210.
When the calendar rolls over into 2018 so too will earnings estimates. The consensus now calls for Alphabet to earn $48.31 per share in 2019, according to Ycharts. This means the stock will trade at only 22 times 2019 estimates. Alphabet won't see significant multiple expansion, though, unless the company can drive earnings growth higher.
The chart above shows how in 2016 and 2017 Alphabet's multiple finished the year around 24 to 25 times one-year forward earnings estimates. It means that if Alphabet goes through its typical yearly multiple expansion cycles, it could climb to a similar level this year, boosting the stock.
Earnings are expected to grow by about 14 percent in 2019 from $42.24 in 2018. Those estimates may be low judging by historical trends. The chart below shows that earnings estimates for 2018 and 2019 have remained relatively unchanged since the start of 2016, meaning there may be room to see estimates rise. Estimates rose at the start of 2017, but took a big hit after the company reported that advertising prices paid per click declined by 4 percent.
From the technical perspective, the stock is setting up for a breakout heading into 2018, showing Alphabet has formed a bullish symmetrical triangle, a continuation pattern. Should the stock break out, it would likely rise towards $1,100 and new all-time highs.
So from both a technical and fundamental perspective, it appears that Alphabet is poised to rise higher in 2018. The gain may not be as spectacular as the one it posted last year, but the numbers suggest that Alphabet's bull run may be far from over.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.