Alphabet, Inc. (GOOGL) continues to  outperform its biggest competitors in the FAANG group, delivering 5% gains year-to-date. After emerging as one of the most profitable tech stocks in 2020, GOOGL is well-positioned to scale  new highs this year, given its latest operational expansion plans and industry tailwinds. GOOGL’s clear dominance in search, digital advertising and streaming segments should drive the company’s growth in the near term as the whole world moves toward a cyber  future.

However, GOOGL declined 3.3% in yesterday’s trading session amid a tech-sell off triggered by rising Treasury yields. Ten-year U.S. Treasury yields topped the 1.6% level yesterday, their highest level in more than a year, in part due to expectations of a fast-paced macroeconomic recovery and rising concerns regarding inflation.

Equity markets reacted poorly to this news and the benchmark S&P 500, Nasdaq composite, and Dow Jones Industrial Average indices declined 2.5%, 3.5% and 1.8%, respectively. However, analysts expect the event to be short lived because the Fed has announced its intention to continue buying back bonds and other assets at its  current pace. In addition, with no signs of a U.S. dollar’s revival, the equity sell off should abate soon.

We think that considering these developments, GOOGL’s price dip provides a perfect entry point for investors that will ensure significant capital gains.

Here’s what we think could drive GOOGL’s performance in the near term:

Strong Corporate Governance and R&D Team

GOOGL is continually venturing into new  spheres to expand its operations across the United States and globally, developed under its ‘Other Bets’ segment. While accounting for less than 1% of its total revenues, most projects designed in this segment typically have a high risk-reward ratio. The company has vested interests in break-through technologies that have the potential to disrupt the tech industry.

However, GOOGL’s ability to vet the potential of such projects, is indicative of its strong management discipline and focus.  For instance, the company intends to close one of its highly coveted moonshot projects, Loon internet balloon, this year, after failing to develop a sustainable business model or partnerships. As a result, GOOGL can divert its unused funds to other projects under the “Other Bets” umbrella, such as healthcare management project Verily, or autonomous car project Waymo.

In addition to this,  GOOGL has partnered with Nokia and Intel on two separate occasions to consolidate its stake in the 5G technology. Also, with  blossoming remote working technology, the company has been spending aggressively on its cloud services to emerge as a leading cloud computing platform globally.

Financial Strength

GOOGL’s impressive financials and growth trajectory are among the key reasons that make it an investor-favorite stock. Its revenues have increased at a CAGR of 18.1% over the past three years, while its net income and EPS have risen at CAGRs of 47.1% and 48.2% respectively, over this period. The company’s EBITDA margin has increased at  a CAGR of 15.3% over the past three years, while its levered free cash flow has grown at a CAGR of 14.9% over this period.

The company has generated $182.53 billion in revenues in its trailing 12-months, its highest since 2017. Its trailing 12-month gross profit value of $97.80 billion yields a margin of 53.58%, 10.4% higher than the industry average  48.52%. GOOGL’s net income margin and ROE of 22.06% and 19%, respectively, compare favorably with industry averages.

Surging Momentum

GOOGL has been reporting impressive price performance over the past year, despite significant volatility and multiple tech selloffs. The stock has gained 45.4% over the past year and 14.3% over the past three months. Also, the company is currently trading above its 50-day and 200-day moving averages of $1941.83 and $1705.82, respectively, indicating a golden-cross uptrend. With most investors predicting the stock will  grow significantly over  the long term, GOOGL has a short interest of 1.09%.

POWR Ratings Reflect Rosy Prospects

GOOGL has an overall rating of A, which equates to Strong Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.

It has an A  grade for Sentiment, and a B grade for both Quality and Momentum. The stock’s popularity among retail and institutional investors is substantiated by its financial strength and growth momentum. The company enjoys favorable analyst sentiment as well; its consensus EPS estimate of $15.93 for the current quarter ending March 2021 represents  a 61.4% improvement year-over-year. GOOGL’s revenue is expected to rise 25% in the current quarter and 24.1% in fiscal 2021.

GOOGL is ranked #1 of 44 stocks in the Internet industry. In addition to the grades I’ve highlighted, you can check out additional POWR Ratings for Value, Stability and Growth here.

There are several other stocks in the Internet industry with an overall rating of A or B. Click here to see them.

Bottom Line

While GOOGL is currently facing antitrust allegations, the company’s almost recession-proof business model and market dominance should allow it to rebound quickly  While the stock is slightly overvalued, its non-GAAP forward PEG ratio of 1.58 is significantly lower than the industry average  2.05, reflecting strong growth prospects. Moreover, the company’s strong foundation and financials should allow it to weather  the antitrust proceedings without bleeding much cash.

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GOOGL shares were trading at $2,044.17 per share on Friday afternoon, up $28.22 (+1.40%). Year-to-date, GOOGL has gained 16.63%, versus a 2.73% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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