Why is Alphabet Inc (NASDAQ:GOOGL) yet to Recover like Other FANG Stocks?

September 28, 2017, 11:53 am ET, BY Simon M.- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Alphabet Inc (NASDAQ:GOOGL) was on track to trading above $1,000 earlier this year when the stock hit a high of $1,008, which was followed by a major decline that affected all FANG stocks. However, other FANG stocks such as Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX) have recovered from the dip and rallied back to trade at the previous levels with the exception of Alphabet Inc.

Although other factors might play a role in Google’s current underperformance, the main reason for Alphabet’s depressed price is its revised earnings per share (EPS) estimate, which was adjusted downwards due to the reporting of GAAP numbers.

At the beginning of 2017, Alphabet’s EPS estimate was priced at $42, but the company shifted to reporting GAAP numbers, which exclude one-time charges. The result was that the EPS estimate for this year dropped to $34, which later dropped to $31 due to the EU fine that was priced at $3 per share.

The shift to reporting GAAP numbers this year has contributed largely to Alphabet’s weakness yet it is highly illogical for investors to value a company based on one-time charges. However, investors have little choice in the matter, as the GAAP numbers are the only available metrics, which can be used to value the company.

Another factor affecting Google’s stock price is the currently declining cost-per-click (CPC) revenues, according to the company’s recent report. However, the declining ad costs are being compensated by the higher numbers of clicks sold by the company.

Despite the declining CPC, Alphabet continues to report high ad revenues due to the massive growth being reported in online advertising. Currently, Google and Facebook Inc (NASDAQ:FB) have a duopoly on the online ad market as together they control over 50% of global online ad revenues.

As more people choose to consume online media as opposed to traditional media such as TV and print publications, advertisers are following them online. Google recently reported a 52% increase in paid clicks on an annualized basis, which more than compensated for the 23% decline in cost-per-click over the same period.

Alphabet is also diversifying and has ventured into other businesses such as cloud computing and self-driving cars, any of which might be responsible for the company’s future growth. The question remains whether Alphabet is a good investment at its current price.

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