It was a rocky start to the year …
But Google (now called Alphabet) managed to quiet its critics. After reporting blockbuster earnings results in July, the tech giant’s stock popped 45% to an all-time high this year.
Don’t be discouraged if you missed this move.
Alphabet is likely to jump another 30% next year as the stock pushes through $1,000 a share.
Let me explain …
Alphabet has had its share of critics since 2014. That’s when the company started seeing slower growth in cost-per-click (CPC). This is a key measure of what advertisers are willing to pay for traffic.
Management tried to explain the reasons why CPCs were declining. Former CFO Patrick Pichette said the slowdown was mostly due to people skipping ads on YouTube, the largest Internet video site in the world which Alphabet owns.
Pichette also said this trend was temporary. However, Alphabet reported weaker-than-expected earnings results for six straight quarters. Analysts began to doubt the credibility of the company. This explains why shares significantly underperformed the market for 18 months.
In March, Alphabet hired Ruth Porat as its new CFO. She previously worked for investment banking giant Morgan Stanley.
Ruth promised to be more transparent about Alphabet’s financials. In other words, Porat would provide more details about Alphabet’s segments outside of search and advertising. This would help analysts better understand the company and the growth potential for its many divisions.
In her first earnings call (July 2015), Porat kept her promise.
Alphabet reported its best quarterly results in nearly two years. She broke down each segment for analysts and investors. The result was a 16% pop in the stock, a move that added $65 billion to the company’s market cap in one day.
Today, Alphabet is trading at an all-time high. But despite the recent jump in the stock, Alphabet still has huge upside potential over the next 12 months.
For example, the company has six products that have more than 1 billion users annually. This includes the Android mobile operating system, Google Search, YouTube, Google Maps, Google Play and Google Chrome.
Google already dominates the smartphone operating system industry. They have more than an 80% share of the market. Apple’s iOS operating system is second with only a 15% market share. This is a huge catalyst for Alphabet, considering the amount of people who now use their mobile phones to shop.
YouTube is projected to generate $7 billion in revenue this year. And Google Play, a digital platform that provides music and movies for its customers, is projected to generate more than $4 billion this year.
To put this in perspective, these two segments are growing 40%-plus annually.
Alphabet also owns Nest, a home automation system where you can program a thermostat and smoke detectors through your mobile phone. They own Google Fiber, a super-fast broadband service that’s being rolled out in cities across the U.S.
These segments are projected to generate $1 billion revenue streams for the company in the near future. I’m sure both will be huge hits at the Consumer Electronics Show in a few weeks. That’s the largest tech conference in the world that takes place every January in Las Vegas.
Alphabet also own Google Capital and Google Ventures. These segments invest in the fastest-growing technologies including large and early-stage companies. A few early investments include a $1.2 billion into transportation giant Uber (Pending: $UBER) and $160 million into Big Data giant Cloudera.
You can see a list of the dozens of private investments from Alphabet’s Google Capital and Google Ventures segments by clicking on the link.
Putting it all together …
Alphabet has spent a ton of cash investing in these properties over the past few years. And many of these investments are finally paying off. They have numerous segments that will generate more than $1 billion in revenue annually.
And this is just the beginning …
The company’s synergies between these segments will result in much-higher margins and stronger cash flow going forward. It will also result in much-higher earnings, which are expected to grow by more than 20% annually over the next two years.
Alphabet is also sitting on $90 billion in net cash. This cash will likely be used to invest in new technologies including its robotics division, space elevators and self-driving cars (these technologies can be found in its Google X division).
I’m sure management will also use this cash to buy back its shares.
After 18 months of pain, Alphabet is now firing on all cylinders. Its investments are finally paying off … analysts are positive given the new model of transparency … and earnings are expected to surge over the next two years.
These catalysts are likely to push the stock through the $1,000 level in 2016. That’s more than 30% gains in Alphabet over the next 12 months.