While the markets have been throwing a fit over the prospects of tariffs and a trade war, certain stocks have actually done quite well, like Alphabet Inc (NASDAQ:GOOG). While the Dow Jones Industrial Average has fallen roughly 250 points Google stock actually has risen.
That makes sense. As I pointed out before, Google belongs to the class of “Trade War” stocks which should head higher regardless of what happens between the U.S. and China.
That is because Google operates multiple hyper growth businesses. It is the world’s largest digital advertising platform, one of the world’s largest cloud businesses, the world’s largest over-the-top media platform, one of the world’s largest consumer smart home businesses, and the world’s leading self-driving company.
None of those businesses will be derailed by tariffs.
Consequently, Google stock is good place to hang-out while the rest of the markets freaks out about a trade war with China.
But Google stock is also much more than that. It is a long-term winner that will reward buy-and-hold investors. Indeed, I think GOOG stock can rally another 20% into the end of the year.
Here’s a deeper look.
How Google Stock Gets To $1,300
Google stock is supported by a really solid long-term growth narrative.
Currently, the company’s bread-and-butter is its massive digital advertising business, which has powered Google to consistent 20%-plus revenue growth over the past several years.
The business will start to slow-down over the next several years as the digital ad industry starts to become saturated.
Also, more and more players are entering the field (most notably Amazon.com, Inc. (NASDAQ:AMZN)). That is why eMarketer sees Google’s digital ad revenue growth slowing to right around 12.5% by 2020.
But slowing growth in that segment will be offset by ramp in the company’s various other segments. Google Cloud continues to gain market share in the hyper-growth public cloud services market.
Considering the explosion of data happening thanks to the mainstream emergence of the Internet-of-Things, Google Cloud should continue to post big growth for the next several years.
Meanwhile, YouTube TV should start becoming a major revenue contributor over the next several years as consumers continue to cut the cord and adopt over-the-top streaming solutions. Google’s smart home products will also continue to drive big growth.
Smart home penetration remains relatively low (only 16% of Americans own a smart speaker, while 77% own a smartphone), and new products continue to rush the market. That combination should drive big growth into the foreseeable future.
Then there is Google’s whole self-driving unit, Waymo, which is currently heavily immersed in the R&D phase. But all signs point to Waymo being at the front of the self-driving revolution. It also looks like Waymo is gearing up to launch a self-driving, ride-sharing service this year.
That has huge implications. Just look at what Uber and Lyft have done with a driver-based, ride-sharing model. Waymo could do much more with a driver-less, ride-sharing model.
All in all, although Google’s core digital advertising business may slow over the next several years, the business as a whole won’t slow because everything else at Google will be in acceleration mode. Consequently, 20% revenue growth is here to stay.
Margins will remain under pressure as the mobile shift continues to bring up traffic acquisition costs. But management expects such margin compression effects to moderate. Plus, as the digital ad business carries less weight into the foreseeable future, the less higher traffic acquisition costs will matter
As such, removing the effects of tax reform in 2018, 20% revenue growth thereafter should flow into 15-20% earnings growth. According to YCharts, Google’s price-to-forward earnings multiple has historically been around 50% higher than its long-term earnings growth estimates.
From this perspective, if GOOG is looking at 17.5% long-term earnings growth after 2018, then Google stock should trade at 26.3x forward earnings at the end of 2018.
Earnings estimates for 2019 stand at $48.50 per share. A 26.3-times multiple on $48.50 earnings implies a 2018 end price target of nearly $1,300.
Bottom Line on GOOG Stock
This is a big growth stock with a not-so-big valuation. That combination tends to reward those who subscribe to the buy-and-hold strategy. As such, when it comes to Google stock, buy and hold is the best move.
As of this writing, Luke Lango was long GOOG and AMZN.