Why Alphabet (GOOGL) is the Best FANG Stock to Buy for 2021
December 23, 2020 at 12:50 PM EST
The "FANG" stocks have been among the best-performing stocks of the past few years. In 2020, Google was the weakest, but it should outperform in 2021. Read more to find out why.
When historians study the first two decades of this millennium, I believe that they will conclude that the Internet was the most impactful new technology. It’s disrupted nearly every part of our life including work, politics, commerce, socializing, and entertainment.
This shift has been reflected in the stock market as well. Over the last few years, the “FANG” stocks have risen to prominence. The acronym stands for Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Alphabet (GOOGL).
These companies’ stocks have risen to valuations that were unthinkable a decade ago as they are dominant within their niche. And, these areas have grown at a faster rate than the overall economy. Additionally, due to the power and leverage of technology, there is little to no marginal cost for these companies to serve new customers.
GOOGL is the king of Internet search with an 87% market share. NFLX is the clear leader in online streaming with 197 million subscribers. Facebook has a near-monopoly in terms of social media. In between, Facebook, Instagram, and WhatsApp, the company has 3.2 billion monthly active users. AMZN has the largest market share in eCommerce and cloud computing.
Effects of the Coronavirus
Often, bull markets end due to a recession. During the recession, the leaders of the previous bull market see significant corrections as investors inevitably become too optimistic about their prospects. A combination of multiple compression and declining earnings is the death-knell for any high-flying stock.
Think about the tech bull market in the late 90s which ended with the Nasdaq dropping by 80% or the housing bubble in which mortgage originators, homebuilders, and financial stocks dropped by a similar amount.
Many believed that a recession would result in the “FANG” stocks enduring a similar decline. However, this has turned out not to be the case. Due to the coronavirus, there was a recession which started in February according to the National Bureau of Economic Research. The FANG stocks did drop along with the broader market, but they demonstrated relative strength.
When the market bottomed in mid-March, this relative strength persisted as the FANG stocks were the first to recover. The major factor was that the recession was unique in that it was triggered by an extraneous factor - the coronavirus. The previous recessions were more typical in that the business cycle rolled over with some parts of the economy overheating, and the Fed was hiking interest rates to curb inflationary pressures.
The coronavirus and ensuing shutdowns led to an acceleration in growth for these companies. AMZN saw revenue growth of 40% and 37% in the second and third quarters, respectively. Netflix added a total of 12 million subscribers in both quarters. In their earnings report, GOOGL and FB noted that they were able to deliver more ads because people were spending more time online.
However, the one notable difference, following the coronavirus, was that the stocks started trading more independently of each other. AMZN and NFLX made new, all-time highs in April - immediately after the market bottomed as their businesses were the biggest beneficiaries of the “new normal”. GOOGL and FB didn’t make new highs until a few months later as their earnings are dependent on businesses using their platform for advertising.
Time to Bet on Google
In particular, GOOGL was affected by these circumstances. The company derives a majority of its revenues from small businesses and 31% from travel-related companies such as online booking websites, airlines, hotels, etc.
Due to its exposure to these parts of the economy, the company posted its first revenue loss in its history. However, these same factors which have hampered the company’s performance over the past year will become an accelerant in future quarters.
Thus, the stock is attractive from a growth perspective as analysts are expecting revenues to climb by 21% over the next 12 months and earnings growth of 59%. Further, there’s increasing interest in autonomous driving. Smaller companies in the sector have seen big gains over the past couple of months. GOOGL’s Waymo is one of the leading companies in this area, and it’s the first to test out actual autonomous vehicles with a pilot program in Arizona that’s been successful so far in terms of safety.
While these two factors make it intriguing from a growth perspective, the stock is also attractive from a valuation standpoint. It’s cheaper than the S&P 500 with a forward price to earnings ratio of 28 despite having faster growth and bigger margins. It has a near-monopoly in Internet search, continued growth in its ChromeOS, and has the second-largest smartphone operating system with Android.
The POWR Ratings are also bullish on GOOGL as it has a Strong Buy rating. It has an “A” for Trade Grade, Buy & Hold Grade, and Peer Grade with a “B” for Industry Rank. Among Internet stocks, it’s ranked #1 out of 61.
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GOOGL shares were unchanged in after-hours trading Wednesday. Year-to-date, GOOGL has gained 29.03%, versus a 16.33% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. As a reporter, he covered the bond market, earnings, and economic data, publishing multiple times a day to readers all over the world. Learn more about Jaimini’s background, along with links to his most recent articles.Why Alphabet (GOOGL) is the Best FANG Stock to Buy for 2021 appeared first on StockNews.com