Alphabet Has a New CEO. 4 Ways Google’s Sundar Pichai Can Boost the Stock. - Barron's |
| Alphabet Has a New CEO. 4 Ways Google’s Sundar Pichai Can Boost the Stock. - Barron's Posted: 06 Dec 2019 03:30 PM PST  "It's time to assume the role of proud parents—offering advice and love, but not daily nagging!" Page and Brin wrote in a blog post announcing Alphabet's leadership transition this past week. Google CEO Sundar Pichai is taking the helm of the entire enterprise, including Alphabet's "other bets," like self-driving unit Waymo. After several years of hands-off leadership, Page is giving up the Alphabet CEO title. Brin is stepping down as president. The executive shuffle, effective immediately, is getting Wall Street excited about the stock again. Alphabet (ticker: GOOG) shares rose nearly 4% in the days following last Tuesday's announcement to a record close of $1,341 on Friday. The stock has advanced 29% this year, slightly ahead of the overall market but way behind the gains of other tech giants like Apple (AAPL) and Facebook (FB), which are up 70% and 53%, respectively. Alphabet is a juggernaut with an incredible set of businesses, including search, YouTube, Chrome, Gmail, Android, Waze, Maps, and Waymo. The company has generated quarterly revenue growth averaging 23%, with little variability, for nearly a decade, including 20% in the latest quarter. That's a huge achievement, given Alphabet's large annual revenue base of $150 billion. Apple, by contrast, saw a 2% drop in its sales to $260 billion in its latest fiscal year. The problem is that Alphabet's earnings growth hasn't kept pace with its revenue gains due to rapidly rising expenses. The company has also been stingy with shareholders. Buybacks are meager, and the company pays no dividend. "Investors want to see greater return of capital, greater focus on managing expenses, and greater transparency," says Mark Mahaney, an internet analyst at RBC Capital Markets, who has an Outperform rating and a $1,500 price target on Alphabet. His view is that things can only get better with Pichai wielding greater power. The big question is whether Brin and Page, who control the company through supervoting stock, will back real change. Alphabet trades for 25 times projected 2020 earnings of $54 a share, a premium to the S&P 500 index's 18 times. But the price/earnings ratio is inflated, given that Alphabet is choosing to lose significant money on moonshots like Waymo and Verily, a health-care services company. The other-bets part of Alphabet's business is losing about $4 a share a year. Despite the losses, those other bets have significant value. Waymo alone could be worth $50 billion or more, analysts say. Strip out losses from the other bets and adjust for Alphabet's $117 billion in net cash and the company's effective P/E ratio is closer to 20. That's appealing. Procter & Gamble (PG), whose revenue is rising at just a 4% clip, trades for 24 times 2020 calendar earnings. Mahaney calls Alphabet one of the "internet staples"—a good alternative to P&G-style consumer staples. The fact that investors don't pay up for Alphabet speaks to unforced errors, a lack of visible leadership in recent years, and regulatory risk. This column has offered prescriptions for fixing Alphabet in the past. In the wake of the leadership change, here are some updated ideas: Boost the stock buyback. Third-quarter stock repurchases of $5.7 billion—more than double the $2.2 billion a year ago—are a start, but the company should increase the pace. Alphabet can sustain a $30 billion-plus annual buyback pace without denting its growing net cash position. Apple, which has the most aggressive buyback program among the tech giants, has repurchased $67 billion in the past year and has been willing to draw down its cash holdings to do it. Alphabet's buybacks, by contrast, have totaled $15 billion in the past four quarters. While the number of outstanding Alphabet shares is down less than 1% in the past year, to 692 million, Apple's is down 6%, to 4.5 billion. Since Alphabet began its buyback program in 2015, its share count is up 1%, while Apple's is down 20%. Blame lies partly with Alphabet's overly generous stock compensation. New shares issued to employees have offset the effect of its buybacks. Alphabet's stock comp this year should total nearly $11 billion, or about $100,000 per employee. Consider a Dividend. Apple and Microsoft have 1% yields. There's no reason that Alphabet can't do the same. Great companies can grow rapidly and still pay dividends. Alphabet could pledge to cap its cash holdings at the current level and return all of its free cash flow to shareholders. Rein in Expenses. The operating margin at the core Google business, which accounts for all of the company's profits, has fallen to 24% in the third quarter from 26.5% in the first quarter of 2017, despite a near doubling in revenue. Blame an explosion in costs, including a 75% rise in the number of employees. Facebook has a similar ad-supported business model, and it manages margins above 40%. That suggests that higher Alphabet margins are achievable. Greater transparency. Alphabet provides little detail about its key individual businesses. Investors in particular are eager to see sales and profitability of the valuable YouTube business. Revenue estimates are in the $20 billion annual range. The other bets segment, which includes Waymo, venture capital, and health-care businesses, is another black box. Alphabet already has one of the world's best business models. Its new CEO has the chance to make it one of the globe's best stocks, as well. Write to Andrew Bary at andrew.bary@barrons.com  |
| Google Is Facing Another Government Probe Into Its Data Business - Fortune Posted: 05 Dec 2019 03:30 AM PST [unable to retrieve full-text content]Google Is Facing Another Government Probe Into Its Data Business Fortune  |
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