Alphabet (GOOGL), the parent company of Google, has been in the news lately, but for all the wrong reasons. Indeed, it seems that politicians and regulators both in the U.S. and abroad have their sights set on the company, asserts Chuck Carlson, editor of DRIP Investor.
Claims of anticompetitive behavior and threats of breaking up the company are no doubt scaring off some investors. Do not be among the frightened.
True, Alphabet could end up paying fines to resolve the charges. And I suppose there is the possibility that the firm could eventually be broken up, though I think the risk of that happening is quite small.
Besides, breaking up Alphabet into smaller pieces might actually lead to a windfall for shareholders (more on that in a moment). Investor focus should be on the company’s fundamentals, and those remain strong.
Alphabet is a money machine, which is probably why politicians have put a bullseye on the company. Indeed, I may be cynical, but I believe a lot of the attacks have less to do with legitimate concerns over anticompetitive behavior and more the opportunity to use Alphabet as an ATM machine, spitting out billion-dollar fees to state and federal coffers.
I do not expect the aggressive rhetoric to lead to significant changes in how Alphabet does business. Rather, I see Alphabet, at some point in the distant future, parting with some of its cash.
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The good news is that Alphabet has plenty of cash — around $132 billion as of the end of the third quarter — and generates prodigious amounts of cash each quarter. Thus, the firm is well equipped to pay whatever fines are assessed.
And if a breakup would become a reality, I would expect Alphabet’s pieces to be worth more than the whole. Indeed, the company’s YouTube unit could be worth $300 billion or more as standalone company, according to one Wall Street firm.
And Google Cloud could be worth more than $225 billion. Thus, when you start adding up the pieces, it is pretty easy to get a total value eclipsing the company’s current market capitalization of $1.17 trillion.
Alphabet has not let the headlines detract from its ability to make money. Per-share profits in the third quarter of $16.40 easily beat the consensus earnings estimate of $11.20. Revenue of $46.1 billion crushed the estimate of $42.8 billion. The company should post solid top- and bottom-line numbers in 2021.
I would expect Alphabet to experience some volatility in 2021 as a result of the attacks on the company, but I would regard any pullbacks as opportunities to build a position in these shares. I own the stock and view it as a capital-gains favorite for 2021.
Please note Alphabet offers a direct-purchase plan as part of Computershare’s online-only DirectStock program. The plan helps bring the high per-share stock price into more bite-size pieces for small investors — minimum initial investment is just $25 in the DirectStock plan.
