Is Alphabet Inc (NASDAQ: GOOG) A Viable Investment in 2018?

January 10, 2018, 18:14 pm ET, BY Simon M.- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Alphabet Inc (NASDAQ: GOOG) had a very successful year in 2017 as it gained about 37% over the year, while at the same time growing its earnings per share significantly. However, as investors are planning their investments for this year, the question on their minds is whether Google shall replicate its previous successes this year.

Article Summary

Google had a stellar 2017 where it stock gained about 37%.

The company dominates the search and advertising industries, which will extend to 2018.

The company has launched numerous business ventures that could drive future growth.

Here’s the trading report on GOOG.

The company continues to be a massive free cash flow generator given that it generated $25.8 billion in free operating cash flow in 2016. This trend is likely to continue given that the company grew its cash reserves to over $100 billion in the third quarter of 2017.

Google currently has the second-highest cash reserves of any listed US company trailing Apple Inc. (NASDAQ: AAPL) by a slight margin. Although Microsoft Corporation (NASDAQ: MSFT) holds more cash on its balance sheet, it also has higher debt levels, hence, its lower net free cash flow.

The company still continues to dominate the digital advertising industry with the only real competitor being Facebook, Inc. (NASDAQ: FB). Given that more advertising revenue is shifting to digital channels, it is highly likely that Google will continue to grow its ad revenues this year.

The company has recently diversified its operations by venturing into other fields such as offering cloud services, which could also generate significant revenues for the company in future. The company has also invested heavily in developing AI systems and driverless car technologies through its subsidiary Waymo, which could also generate massive revenues for Google this year.

Although many investors and analysts might assume that Alphabet is expensively priced given its P/E ratio of 36.72, I believe that the company is fairly priced in relation to other large caps. Google has a better growth trajectory than most large caps and technology companies given that it has a peg ratio of 1.63, which makes the company fairly priced in relation to its future performance.

Google is likely to repatriate some of its cash reserves to the US given the passage of the new tax reform law, but the company already enjoys a low tax rate. Alphabet has a lot of potential in its new business ventures, which cannot be quantified at the moment, but could generate massive revenues for the company in the future.

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