James Cakmak an analyst at equity research firm Monness, Crespi, Hardt & Co. really likes Google parent company Alphabet. In fact, he told CNBC that he believes the company is likely to outperform other tech stocks including the much-vaunted FANG’s – i.e. Facebook, Amazon (or Apple), Netflix, and Google.
Part of the reason for this opinion is Alphabet’s current valuation of 10 times EBITDA which is lower than other companies in the sector. For example, Amazon is currently trading at roughly 19 times EBITDA and Facebook is at 13 times.
This valuation might come as a surprise, but Mr. Cakmak contends part of the reason is Google’s focus on operational improvements over the past year. Not only have these improvements helped to reorganize the company, but they have led to progress in optimizing user experience. This has resulted in increased revenue from advertising.
However, Alphabet’s status as a bargain is unlikely to last for long. Shares of traded up .47 percent on Wednesday to close at $829.86. While shares were trending down in after-hours trading, yesterday’s close represented a 90-day high and were marginally off the 52-week high of $835.74 which was reached in late October.
According to Mr. Cakmak, both Amazon and Facebook may face problems living up to investor expectations in the near term and he concluded that both stocks are slightly overpriced. As such, he kept a neutral rating for both.
Another factor which weighed on Mr. Cakmak’s expectations for Alphabet was the fact that its senior executives appear to have good relations with incoming President Donald Trump. While this could be a double-edged sword, especially if the Trump administration gets caught up in scandal and intrigue, Mr. Cakmak believes this will give the company’s leaders a chance to influence tech-related policies with the new administration.
One such policy is the ‘Net Neutrality’. Whilst a reversal on the Federal Communications Commission (FCC) stance would impact Google less than companies such as Netflix, the fact that YouTube is a major player in the streaming video space means that Google has a stake in the game. As such, analysts believe it will lobby hard to ensure that ‘Net Neutrality’ remains the standard for managing internet traffic in the U.S. and elsewhere.
Another issue which Google executives hope to influence is immigration. Similar to other tech companies, Google relies heavily on foreign-born scientist and engineers. In fact, Google co-founder, Sergey Brin, was born in the former Soviet Union.
As such, the company hope to maintain an immigration policy which will allow it to recruit the best-and-brightest minds from around the world. This might run into conflict with a President Trump who has vowed to undo the H-1B visa program – also known as the ‘Genius Visa’.
One final issue would be repatriation of foreign profits. According to Moody’s, the company has more than $40 billion dollars offshore. As such, any change in U.S. tax policy might give the company an opportunity to rethink its cash allocation strategy.