(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of GOOGL.)
Alphabet Inc., parent company of dominant search engine Google (GOOGL, GOOG), has bulls that are becoming a lot more bullish as earnings approach. Since January, analysts who cover the company have boosted their revenue estimates and stock target. They now forecast the shares will rise by about 22%.
Strong revenue growth underpins that optimism. First-quarter earnings are expected to be announced on April 23, and analysts estimate revenue climbed by 22.5% as earnings fall by 7% during the quarter. But it is the full-year estimates that look strong, with estimated revenue climbing by nearly 20.5% to $133.56 billion in 2018, while earnings are expected to jump by almost 30% to $41.45 per share. Alphabet's numbers look robust compared to slower growing technologies companies such as Microsoft Corp. (MSFT), a major rival in the cloud space. Microsoft is forecast to grow earnings and revenue by only 9% in 2019, with shares trading at nearly 24 times 2019 estimates, a very pricey multiple. (For related reading, see also: Alphabet Stock Begins 2018 With Positive Charts.)
Of the top 25 companies in the Select Sector Technology SPDR ETF (XLK), the average one-year forward PE ratio is 20.25, with a median of 20.6. Alphabet shares currently trade around 21.6 times 2019 earnings estimates of $48.16 per share, roughly in-line versus some of its slower-growing sector peers.
Strong growth will be needed to turn around Alphabet's stock, which has fallen by over 12% from its highs back at the end of January, and are down just 1% for 2018, roughly in line with the performance of the S&P 500. Technical analysis of the stock's chart supports analysts' optimism. The charts suggest shares of Alphabet may have bottomed and are set to rise.
Technically shares of Alphabet have stabilized and held critical technical support levels around $1,000, a sign that shares may have ultimately found a bottom. Volume levels have declined since shares started falling in the middle of March, in a sign that perhaps the number of sellers are declining. Additionally, it appears the stock's relative strength index may have bottomed and is now beginning to trend higher, a bullish indication. It could be a sign shares are poised to rise back to resistance around $1,080 to $1,100, an increase of about 6%. (For more, see also: Alphabet's Bull Run May Be Far From Over.)
Rising Price Targets
Analysts have increased the average price target on the stock by nearly 8% since the start of 2018, rising to $1,277 from $1,185, according to data from Ycharts. That is an increase of over 22% from its current stock price around $1,050. Nearly 86% of 45 analysts that cover the stock rate it a "buy" or "outperform," while 16% rate the shares a "hold".
With technical support now put in place, and a bullish group of analysts, the outlook for Alphabet appears to be improving. First quarter results on April 23 will determine if the chart and the analysts are right.
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.