Alphabet: Non-Search Businesses Worth More Than Current Market Cap

An analyst initiates a "Hold" rating on Google (GOOGL), arguing that despite year-to-date underperformance relative to the S&P 500 and attractive P/E ratios, the current valuation does not present a "Strong Buy" opportunity. The analyst highlights continued growth in Google Search, potential savings from reduced payments to Apple, and undervaluation by the market as key factors, while also noting a central risk for investors.

Analysis

Google (GOOG/GOOGL) has demonstrated negative year-to-date returns, underperforming the S&P 500, even as its earnings growth has materialized, leading to P/E ratios seldom seen in the company's history. An analyst highlights that Google Search appears to be valued at a near-zero multiple despite its continued growth, even with concerns surrounding Safari. Furthermore, potential cost savings could arise from reduced payments to Apple. A sum-of-the-parts valuation executed by the analyst suggests the market currently does not fully recognize Google's intrinsic value. Despite these positive fundamental assessments and the compelling valuation, the analyst initiates a "Hold" rating, indicating that while the business is strong, the current pricing does not meet their stringent criteria for a "Strong Buy" recommendation. The analyst also alludes to a central risk for investors, which is not detailed in the provided information but warrants attention.

Key Decisions for Investors

• Investors should acknowledge the analyst's "Hold" rating on Google, which, despite strong fundamentals such as continued Search growth, potential Apple payment savings, and historically low P/E ratios, suggests the current stock price may not represent a sufficiently compelling entry point for those with very high return thresholds.
• Consider the analyst's sum-of-the-parts valuation thesis, which posits that key segments like Google Search may be significantly undervalued by the market, offering potential long-term upside if this value is eventually recognized.
• It is advisable to monitor developments concerning Google's Search business, particularly in relation to Safari, the status of payments to Apple, and to seek further information regarding the unspecified "central risk" highlighted by the analyst, as these factors could influence future valuation and performance.