On Monday night, Alphabet Inc., better known as Google, became the largest company in the world by market cap when the stock soared in after-hours trading following the release of its fourth-quarter and year-end results.
The search engine giant supplanted Apple in the number one spot after the shares broke through the $800 level (figures in U.S. dollars). According to The Wall Street Journal, that pushed Alphabet's market value to $560 billion, surpassing Apple's $539.7 billion.
However, Alphabet's position at number one was short-lived. The stock tumbled on profit taking after Monday's exuberance, dropping about $100 from the high. By Friday's close, Apple was sitting back at the top of the heap and Alphabet investors who had jumped in after the financial release were left licking their wounds.
Talk about a roller-coaster ride!
The big sell-off came as a shock. Alphabet's shares, which trade under the symbols GOOG and GOOGL, had been rising steadily for the past year. On Feb. 2, 2015 GOOGL was trading at $521.72. It hit a high of $810.35 on Feb. 2, 2016, up 55% in 12 months. GOOG shares, which are non-voting, went from $521.33 to $789.87, a gain of 52%. But then the bottom fell out, fuelled in part by a sense the shares had risen too far too fast and in part by the news that highly-respected Amit Singhal, the head of search at Google, will leave the company later this month. GOOGL finished the week at $703.76 while GOOG was at $683.55.
Apple stock, by contrast, had been slipping as investors become increasingly concerned about the slowdown in iPhone sales. In early February last year the shares were at $119.56; they closed on Friday at $94.02 for a one-year loss of 21%. However, they held pretty steady last week in the face of the Alphabet sell-off.
The big drop in Alphabet's price obscured the positive news that permeated the financial results.
For starters, Monday's release marked the first quarterly report to be produced under Alphabet's corporate reorganization. Last August it announced a major restructuring that created Alphabet as a holding company with several autonomous business segments under it. They include Google, which incorporates Android and YouTube, Nest (home automation), Calico (anti-aging research), Fiber (high-speed Internet), Google Ventures (new company investments), Sidewalk Labs (city infrastructure), and X Lab (driverless cars and other "moonshots").
Analysts immediately praised the restructuring, saying it would make the company's sometimes opaque financials much more transparent. The results released last week largely confirmed that. For the first time, investors got a direct look at the profitability of the core Google business and the costs of the company's embryo projects, such as self-driving cars. These were grouped in a segment called, appropriately, "Other Bets".
The overall results showed why investors temporarily vaulted Alphabet into the number one position. Fourth-quarter revenue was up 18% year-over-year to $21.3 billion, handily beating expectations. Had it not been for the strong U.S. dollar depressing the value of foreign sales, revenue would have been up by about another $1 billion.
Using GAAP accounting principles, net income was $4.9 billion ($7.06 per share) compared to slightly less than $4.7 billion ($6.79 per share) a year ago. Interestingly, the number of Alphabet shares in circulation fell by about 8.5 million as the company continues its buyback program despite the fact the stock has been trading at all-time highs.
The Google segment reported full-year revenue of $74.5 billion, up 13.5% from 2014. Gross operating income was $23.4 billion, which was 23.2% better than the year before. "Other Bets" produced $448 million in revenue, a 37% improvement, but posted an operating loss of $3.6 billion, up from $1.9 billion in 2014.
The company was sitting on just over $73 billion in cash and marketable securities at year-end. However, 58% of that money is held overseas and Alphabet can't bring it back into the U.S. without incurring corporate taxes, a festering complaint with many multi-nationals.
Putting all the numbers together, Alphabet has consistently beaten analysts' and investors' expectations in recent quarters. Apple, by contrast, has consistently disappointed and needs another iPad or iPhone. Steve Jobs, sadly, is no longer around to provide it.
I recommended Alphabet shares in the IWB in March 2014, saying at the time that the company could be the Berkshire Hathaway of the 21st century. I still believe that two years later. The share price at the time was $1,214.79. Shortly thereafter the stock effectively split two for one, leaving us holding both the class C voting shares and the class A non-voting shares in equal amounts. The split-adjusted price was $607.40.
Last Monday the stock was trading at a p/e ratio of close to 34. Now it's down to less than 30. That's still on the high side, but it's a lot cheaper than it was just a few days ago.
Action now: Buy. Take advantage of the pullback to establish a position if you don't already have one.
