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Alphabet Leapfrogs Apple to Top of the Heap

By David Jones
Feb 3, 2016 7:00 AM PT

Google's new parent, Alphabet, sent a tingle up the spine of investors on Monday after reporting fourth quarter earnings that exceeded expectations. The good news sent its share price skyward, resulting in a market valuation that surpassed Apple, which for years has been the most-favored technology firm on Wall Street.

Alphabet reported adjusted earnings of US$8.67 per share, compared with $6.76 in the year-ago quarter, beating analyst estimates of $8.10 per share.

Revenue rose to $21.3 billion, a 24 percent increase compared with the year-ago quarter, beating Wall Street estimates of $20.8 billion.

"Our very strong revenue growth in Q4 reflects the vibrancy of our business, driven by mobile search as well as YouTube and programmatic advertising, all areas in which we've been investing for many years," said Alphabet Chief Financial Officer Ruth Porat.

Loss Leaders

The company reported segment earnings and revenue, classifying non-Google earnings as "Other Bets." Those include Nest, Google Fiber, self-driving cars, Calico and other endeavors that incurred more than $3.56 billion in losses for the year on revenues of $448 million. Alphabet termed the forward-thinking money-losing segments of its business as "moonshots" during the quarterly conference call.

Alphabet shares rose more than 8 percent following the earnings report, raising the company's market cap to about $559 billion.

During the quarter, the company bought back 2.4 million shares of Alphabet stock for a total of $1.8 billion. The Alphabet board of directors last month authorized another buyback of 514,000 shares with a total remaining authorization for future purchases of $3.7 billion.

Don't Worry, Be Happy

Alphabet is aiming for more than short-term profitability, said Kevin Krewell, principal analyst at Tirias Research.

"The company has much more ambitious goals -- finding radical innovation that can create all new industries," he told the E-Commerce Times. "To find unconventional innovation requires unconventional thinking."

The core Google business is profitable enough to allow Alphabet to pursue longer-term projects through its other segments -- like artificial intelligence, self-driving cars, and other non-search and advertising-related businesses, said Krewell.

If successful, the end result could be transformational for the company in the long term, he added.

"I like that some companies -- like Alphabet, Facebook and Amazon -- are experimenting and pushing the boundaries," Krewell remarked. "It's what Silicon Valley is all about."

Investor Sentiment Rules

Google has a commanding position in the online advertising space, which it is leveraging to expand into other areas, such as broadband networking, cloud services and mobile devices, said Mike Jude, program manager at Stratecast/Frost & Sullivan. "This is proving very successful, and its market capitalization reflects just that."

There may be a valuation issue with Alphabet, Jude noted, but it applies generally to much of the tech market -- so when compared to Apple, for example, Alphabet's valuation seems appropriate.

Market cap is more a reflection of investor sentiment than a company's true value, observed Charles King, principal analyst at Pund-IT.

"Alphabet's rise to the top of the market cap heap suggests that investors approve of the company and its management," he told the E-Commerce Times.

However, the rise of Alphabet would not have been possible without the massive drop in value of Apple's share over the past two months, King pointed out, which cost it more than $200 billion in market value.

"Legitimacy doesn't come into it," he said. "You can successfully argue about Alphabet's value from both sides of the equation, but the company currently has a hold on investors' interest and their pocketbooks."


David Jones is a freelance writer based in Essex County, New Jersey. He has written for Reuters, Bloomberg, Crain's New York Business and The New York Times.


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