Alphabet (GOOG) (GOOGL) On Its Way to $1000 - RBC Capital's Mahaney
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Mark Mahaney from RBC Capital published a note highlighting how Google's Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) new reporting structure will increase transparency and should increase the multiple assigned to earnings. The combination of unicorn revenue upside and a higher multiple should bring Google to a $1000 valuation per share.
Core Google has maintained an impressive 17%-23% Y/Y organic revenue growth every quarter for 3 years, despite a $70B+ run-rate. Hyper-growth (40%+) segments like YouTube ($7B in ’15E revenue) and Google Play ($4B in ’15E revenue) will likely help sustain high overall growth rates. Finally, we estimate that Core Google enjoys Op Margins close to 50%.
"Other Bets" contains Nest, Google Fiber, the Google Capital and Google Ventures investments, along with multiple other divisions. There is the potential for substantial value creation out of efforts to develop autonomous vehicles and to “combat aging,” and Nest and Google Fiber have business models already in place to generate $1B+ revenue streams.
Mahaney believes that the Other Bets Segment is on track to generate Operating Losses of $3-6B in 2015. These are very high levels, but are consistent with Google’s long-standing 70-20-10 investment framework. And these very high levels suggest significant opportunity for more efficient cost/investment management by GOOGL’s new CFO.
A reasonable Sum-of-Parts valuation approach would apply a range of P/E multiples (17X-25X) to Core Google’s 2017E Operating EPS ($41-$52, depending on growth & margins) + approximately $7B to capture the Other Bets (detailed within) + the $90B in Net Cash estimated for Alphabet by YE16 (GOOGL is now buying back shares). The result would likely = GOOGL @ $1,000+,
Despite emphasizing a price of $1000, the price target does not increase from $880 and the rating remains Outperform
For an analyst ratings summary and ratings history on Alphabet click here. For more ratings news on Alphabet click here.
Shares of Alphabet closed at $742.60 yesterday.
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