JMP Sees Google Worth $847 Ahead Of Alphabet Transition

• Google Inc GOOGL shares have appreciated 23 percent year-to-date, while having lost 3 percent since August 21.
• JMP Securities’ Ronald V. Josey maintained a Market Outperform rating on the company, while raising the price target to $847 from $720.
• Josey believes that the segregation of the core Google business from the other Alphabet businesses creates a more valuable core segment.

Google is preparing to convert to Alphabet and report results from two separate segments, namely the core Google and other Alphabet businesses, beginning with the 4Q15 results.

Analyst Ronald Josey said that the main takeaway of a profitability analysis is that “core Google is likely to be significantly more profitable than the parent company.” He added that this could result in an appreciation of the shares.

In the report JMP Securities noted, “Overall, we believe Google is one of the most innovative companies globally, is very well positioned across almost every growth driver on the Internet, and with the new Alphabet structure, we believe is better positioned to invest and grow going forward.”

In view of the “inherent profitability” of Google’s core Search and ads business, Google’s core pro forma operating margins are estimated at +50 percent. In case revenue growth continues to reaccelerate and margins expand, as was the case in 2Q15, the pro forma operating margins at core Google may continue to grow, Josey added.

Josey wrote further, “…with increased transparency, we now value shares on an SOTP basis. Our 13x 2016E EV/EBITDA target multiple for core Google represents a significant discount to its peers and our 1x 2016E revenue multiple for Alphabet’s other business lines is likely conservative.”