Alphabet (GOOG) Stock Has a New Bull on Wall Street


There’s little doubt that Alphabet (GOOG) has plenty of fans on Wall Street. Now you can add a new one to the list. Needham analyst Laura Martin initiated coverage on GOOGL stock with a Buy rating and price target of $1,350, suggesting the stock could advance about 15% in the coming year.

Martin is one of the top analysts on Wall Street covering the media industry. Investors who listened to Martin over the past year have made 19.7% on their Martin bets, according to TipRanks. The analyst is currently ranked #98 out of 5233 analysts.

Also read: Top Analyst Bullish on Alphabet Stock on Back of Accelerating Growth in Mobile Search and YouTube Engagement

Martin has put together a rough approximation of what Alphabet is worth by valuing each of its key business lines separately, then stripping away net debt and non-operating liabilities, and adding in non-operating assets (this is known as a sum-of-the-parts (SOTP) analysis). The conclusion: Alphabet trades at a 43% conglomerate discount.

The analyst noted, “Our key learnings from the SOTP analysis include: 1) GOOGL’s business lines have a wide range of comp valuations, from a low of 1.8x revenue to a high of 50x revenue; 2) “Other Bets” are less than 1% of revenue but 5% of GOOGL’s value; 3) GOOGL’s search engine represents about 43% of GOOGL’s value; 4) YouTube’s ad plus subs businesses together are about 19% of GOOGL’s value; 5) Cloud represents about 13% of GOOGL’s value; and 6) non-income statement assets (ie, tax, real estate, brand value, etc.) add about $425 of value per GOOGL share.”

The analyst did a deep dive into YouTube’s P&L and valuation and came to the conclusion that YouTube’s 2018 consolidated revenue was $26 billion, well above consensus view $13 billion. Martin noted, “Press reports suggest that YouTube’s revenue was around $13B in 2018. Our five forms of valuation suggest that GOOGL consolidated about $26B of gross revenue from YouTube into its 2018 income statement. We believe YouTube loses money, so an EV/revenue multiple is required to value it. Using NFLX as a benchmark implies that YouTube’s value is about $140B, representing 19% of GOOGL’s value.”

The analyst concluded, “If GOOGL were to spin off 10% of its largest 2 or 3 businesses (YouTube, Cloud, etc.) we believe this would unlock significant hidden value while keeping control, accounting consolidation, and 90% of the valuation upside for GOOGL. Importantly, we see valuation downside for the “do nothing” option since FB is GOOGL’s single biggest FAANG menace (our view), and FB already has a lower cost of equity.”

Overall, as mentioned, Martin is certainly not the first analyst with an optimistic outlook for the internet giant, as TipRanks analytics showcasing GOOGL stock as a Strong Buy. With an average price target of $1,346.04, analysts are predicting an upside of nearly 15%. In total, the stock has received 28 ‘buy’ ratings vs. just 1 ‘hold’ rating in the last three months. (Get TipRanks’ free analysis report on GOOGL)

 

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