Stocks

Google/ Alphabet May Earn Multiple Expansion

Google stands to gain significantly thanks to growth in mobile search advertising, and as a result, a multiple expansion could be on the way. Despite the company’s efforts to improve transparency by breaking the core search business apart from its moonshot projects, the fact remains that search will remain the key growth driver, at least for now.

Google New Logo

Mobile search may speed up Google’s growth

In a report dated Nov. 11, MKM Partners Managing Director Rob Sanderson said he thinks mobile search represents a huge opportunity for Google and its parent company. He believes most analysts are underestimating the impact from mobile search for a handful of reasons. First, he notes that there are now more mobile subscribers than desktop internet users.

Second, he pointed out that users have their mobile devices with them almost all the time, and third, he said mobile is better able to serve more retail categories than desktop computers can. And finally, he sees mobile advertising as offering marketers better capabilities to reach consumers closer to the moment when they actually make a purchase. This should improve retailers’ return on investment, which he says is already inherently high on mobile devices.

Mobile should accelerate Google Websites revenue

The analyst also expects that mobile search will push revenue for Google Websites higher over the next several quarters and possibly in the next few years. He said this year the volume of mobile search queries is surpassing that of desktop volume. He added that this means mobile search is now big enough and growing fast enough to drive more growth for Google’s Websites business, noting that in the third quarter, this was the main acceleration driver.

Sanderson said it’s even possible that this trend will go beyond the next quarter or two and possibly be sustainable over several years.

Alphabet price target increased

The analyst also sees significant opportunities in YouTube advertising, as he thinks the video website is now in a strong position, particularly as advertisers shift some of their spend from TV to digital ads. He called YouTube “a complement to your primary growth story,” adding that this means “things are pretty good.”

He also appreciates the recent shareholder-friendly steps management has been taking, like the new reporting structure and the first-ever share buyback program. He sees the potential for value creation through other types of capital reallocation and believes that Google’s opportunity for multiple expansion is “the best it has been in years.”

Because of these views, he raised his price target for Google parent company Alphabet Holdings from $805 to $940 per share

Shares of Alphabet fell by as much as 0.28% to $763.09 per share during afternoon trading hours today.