Alphabet Inc: The devil is in the details

“On Monday, we received the fourth-quarter results from Alphabet. The headline numbers showed big beats, sending the stock to a valuation higher than that of Apple,” Bill Maurer writes for Seeking Alpha. “While Wall Street rushed to raise its price targets higher and higher, most seemed to ignore some key problems with this report.”

MacDailyNews Take: As far as most sell-side analysts go, the only thing that really matters is commission-generating churn.

“Everyone loved the big beat on the bottom line, with the company reporting non-GAAP EPS of $8.67 versus a Street estimate of $8.10. However, the company received a big benefit from a one-time item,” Maurer writes. “For Q4, Alphabet had an effective tax rate of 5%. For all those who criticize Apple for its tax situation, Alphabet should receive some flak. For the quarter, the company had GAAP net income growth of just 5%, and that included the tremendous tax benefit. Had the tax rate been equal to the year-ago period, Alphabet would have likely reported at least a $400 million decline in net income.

“As I write this article, Alphabet is trading at about 23 times expected non-GAAP EPS for this year. If you shift that valuation to GAAP, you are around 28 times,” Maurer writes. “Apple trades for just 10.5 times earnings, with a number of other large tech giants trading in the teens.”

“In the end, Alphabet’s quarter was not as impressive as the headline results suggest,” Maurer writes. “A big tax break fueled the bottom line beat, likely hiding a drop in quarterly GAAP net income. Over the next couple of years, Alphabet will need to keep spending in check to avoid a big drop in net profit margins.”

Read more in the full article here.

MacDailyNews Take: Welcome to the market value mountain top, Alphabet. Let’s see how long you can manage to stay there.

Alphabet Inc. surpasses Apple, now the world’s most valuable company – February 1, 2016

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