Gene Munster: Google's Alphabet Transition Means Two Things

In a report published Tuesday, Piper Jaffray analyst Gene Munster maintained an Overweight rating on Google Inc GOOGL GOOG, with a price target estimate of $723.

Google had announced a reorganization of its corporate structure under a new holding company named Alphabet Inc. Analyst Gene Munster said that there could be two “important takeaways from this move.”

1. The new structure would demonstrate “the true profitability” of Google's core search and advertising business, including YouTube
2. This would provide improved focus across all of the company's business lines, including Google's core advertising business, which would now be run by Sundar Pichai

The company expects to report under the new structure when it releases its December quarter results. The structure would include:

• Alphabet: Parent company trading under the tickers GOOG and GOOGL
• Google: Advertising company within Alphabet, which would include Search, YouTube, Chrome, Maps, Android, and DoubleClick
• Other Projects: Other core projects like Fiber, Calico, Nest, Google X, Google Ventures and Google Capital are to operate as their own companies under the Alphabet structure.

In the report Piper Jaffray noted, “Google has historically talked about a 70-20-10 expense breakdown with 70% in the core including search, 20% emerging and 10% in “moonshots.” Assuming the non-advertising business falls under the "moonshot" category, Google will spend about $2.9 billion in operating expense in 2016, that would demonstrate an incremental $3.22 to EPS for the core advertising business in 2016, or about 9% to EPS.”