Google Is Arguably The Best Risk/Reward In Large-Cap Internet

“Google is arguably the best risk/reward in large cap internet, with ~20 percent revenue & EPS CAGRs for the next few years & a 2018e 20x GAAP EPS multiple.”

That's what Barclays’ Ross Sandler said in a note, initiating coverage of Alphabet Inc GOOGL with an Overweight rating and price target of $1,065.

Bull Case

The analyst mentioned that the pace of innovation at the company was high, especially since Alphabet updated many of its core applications using its advanced machine learning (AI), while expanding into areas like Cloud and Hardware.

“There is ample room for mobile advertising to keep taking share from other channels, and Google should capture its consistent ~50 percent of every incremental dollar going forward across both YouTube & Search,” Sandler said.

The analyst doesn't expect Alphabet’s core operating margin to expand, since the revenue mix is skewed to lower margin areas growing more rapidly than ads, although “Other Bets” could reduce their loss, which would then drive upside to the consensus EPS expectations.

“Google may also benefit from cash repatriation, further supporting shares in 2017/18,” Sandler stated.

Related Link: Google Downgraded On European Ad Concerns

Bear Case

On the other hand, the analyst pointed out that Alphabet was a maturing company that “had its hey-day in desktop and to a lesser degree in mobile. Its centrality to the space going forward is strong but clearly less dominant.”

In addition, the company is in the process of transitioning from “search-primarily” revenue to other areas, which entail materially lower margins and where the company doesn't have a strong competitive advantage.

Sandler also noted “2016 was a year that benefitted from considerable monetization improvements in mobile search, and we think growth could decelerate from here.”

However, the analyst expects the stock to continue its gradual appreciation, as it had done through 2016.