Alphabet a good investment, says Momentum Securities

Momentum Securities’ stock pick of the week is American multinational technology holding company Alphabet.

Alphabet, headquartered in Mountain View, California, is best known for owning Google, YouTube, Android, and Waymo.

It is one of the most valuable companies in the world, with a market cap of $1.44 trillion, annual revenue of $258 billion, and earnings of $76 billion.

In its latest trading update, Alphabet reported second-quarter revenue, excluding payments to distribution partners, of $57.5 billion, which met analysts’ expectations.

It also showed that it has a robust business which can perform well amid slowing growth in advertising.

Google’s cloud division – a core part of the company’s growth strategy – generated $6.3 billion in revenue and lost $858 million.

Momentum Securities equity analyst Faheema Adia said Alphabet’s share price came under pressure after Jerome Powell signalling that the US central bank is likely to keep raising interest rates.

Powell’s comments resulted in an aggressive market sell-off, which Adia believes created an excellent opportunity to buy Alphabet at a favourable price.

“What attracts us to Alphabet is the focus on investments in artificial intelligence and machine learning,” she said.

“These technologies have been used to improve web searches, bring new features to advertisers, and help to boost revenue and earnings.”

She added that Alphabet’s results for the year were strong, and second-quarter revenue increased by 13.5% despite a challenging macro backdrop.

From a valuation point of view, Alphabet is trading at a more favourable forward PE than its peers and its 5-year historical average, which shows it is undervalued.

“Moreover, the consensus of almost fifty analysts has a buy recommendation with a target price of $141, implying an upside of around 28% over the next year,” Adia said.

“From a technical point of view, our in-house technical analyst is looking at a technical entry point to buy between $106 and $108.”

The chart below shows Alphabet’s share price over the last three years.

Alphabet’s revenue and income

The charts below provide an overview of Alphabet’s revenue and profit over the last fifteen years.

There is a clear upward trend with accelerating revenue and income growth.