Alphabet Inc. (NASDAQ:GOOG) advertising business will drive GOOGL stock price

Alphabet Inc. (NASDAQ:GOOG) advertising business will drive GOOGL stock price

It might seem like there’s a lot to the Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) stock price. After all, Alphabet has a hardware business, including its Pixel phone, Google Home, and Nest. It has a venture capital arm: Google Ventures. There’s also their self-driving startup Waymo. Alphabet has a cloud business, too. It would seem as if there’s a lot to keep track of when it comes to Alphabet stock.

But that’s really not the case. GOOGL still relies heavily on the search business on which it was based at the time of its founding, 20 years ago next month. The other businesses are interesting and get some media coverage. But even Waymo — likely the most valuable of the company’s non-advertising efforts — accounts for only a modest fraction of the overall value here.

That’s one of the reasons I’ve long been relatively bearish toward Alphabet stock. The ad business has been a juggernaut, to be sure. But there are risks ahead. The continuing shift to mobile phones was one of the reasons the GOOGL stock price saw pressure earlier this decade. Alphabet obviously has adapted, but higher usage of apps — and less usage of Google browsers — creates a similar risk going forward.

Even with those concerns, however, I’ll admit that Alphabet stock is getting interesting. Q2 earnings looked quite strong on the advertising front, even if they weren’t quite as amazing as headline numbers seemed to show. The GOOGL stock price suggests a reasonable valuation for that underlying business. And there is some value in the non-advertising initiatives.

Advertising Will Drive the GOOGL Stock Price

That model, however, requires that the advertising business do the heavy lifting. Even Waymo, at Morgan Stanley’s hefty valuation, accounts for barely 20% of the current market capitalization and less than that at a $1,300+ share price.

Google hasn’t been great in hardware, where it has lost steadily to the likes of Roku(NASDAQ:ROKU) and even NETGEAR (NASDAQ:NTGR), let alone Amazon (NASDAQ:AMZN) and Apple (NASDAQ:AAPL). Fiber has been somewhat of a disappointment. Capital G is making profits — but it’s not going to make billions of dollars a year every year. Cloud growth was a bright spot in Q2, but at a run-rate of $8 billion annually, drives barely 5% of total revenue.

And there are real risks to the advertising business. The Android OS makes quite a bit of profit from Google Play — but companies like Netflix (NASDAQ:NFLX) are trying to work around Play and the Apple App Store. Google’s revenues in search are rising; it’s traffic acquisition costs generally have risen faster, though that trend stopped in Q2 (that’s one reason, beyond the headlines, I saw the quarter as a positive).

Even the Q1 miss Alphabet posted is a concern. Alphabet never really explained what happened and largely refused to do so when asked on the Q2 conference call. As good as the business has been, there are questions as to whether it will be that good going forward — or at least good enough to support a $500 billion-plus enterprise value (backing out cash and the value of Waymo).

This is a stock that has traded sideways for a good eighteen months. Over that stretch, underlying earnings have grown — which means GOOGL stock has gotten cheaper. Whether it’s cheap enough depends on whether advertising profit growth can continue. Q2 certainly helps on that front.

Technical Indicators

Overall, the bias in prices is: Upwards.

By the way, prices are vulnerable to a correction towards 1,149.54.

The projected upper bound is: 1,243.42.

The projected lower bound is: 1,106.15.

The projected closing price is: 1,174.79.

Candlesticks

A big white candle occurred. This is generally considered bullish, as prices closed significantly higher than they opened. If the candle appears when prices are “low,” it may be the first sign of a bottom. If it occurs when prices are rebounding off of a support area (e.g., a moving average, trendline, or retracement level), the long white candle adds credibility to the support. Similarly, if the candle appears during a breakout above a resistance area, the long white candle adds credibility to the breakout.
During the past 10 bars, there have been 3 white candles and 7 black candles for a net of 4 black candles. During the past 50 bars, there have been 25 white candles and 25 black candles.

Momentum Indicators

Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.

Stochastic Oscillator

One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 26.8298. This is not an overbought or oversold reading. The last signal was a buy 0 period(s) ago.

Relative Strength Index (RSI)

The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 52.88. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a sell 6 period(s) ago.

Commodity Channel Index (CCI)

The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is -22. This is not a topping or bottoming area. The last signal was a sell 5 period(s) ago.

MACD

The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a sell 1 period(s) ago.

Rex Takasugi – TD Profile

ALPHABET INC C closed up 4.040 at 1,173.990. Volume was 5% below average (neutral) and Bollinger Bands were 24% wider than normal.

Open     High      Low     Close     Volume___
1,156.0001,178.4451,149.6241,173.990 1,444,324
Technical Outlook 
Short Term: Neutral
Intermediate Term: Bullish
Long Term: Bullish
Moving Averages: 10-period     50-period     200-period
Close: 1,196.30 1,124.11 1,119.64
Volatility: 66 38 36
Volume: 2,151,275 1,602,886 1,643,001

Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.

Summary

ALPHABET INC C is currently 4.9% above its 200-period moving average and is in an upward trend. Volatility is extremely high when compared to the average volatility over the last 10 periods. There is a good possibility that volatility will decrease and prices will stabilize in the near term. Our volume indicators reflect moderate flows of volume out of GOOG.O (mildly bearish). Our trend forecasting oscillators are currently bullish on GOOG.O and have had this outlook for the last 33 periods.

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