Sanderson: Google Worth $950, A Bargain Versus Incumbent Media

MKM Partners’ Rob Sanderson maintained a Buy rating for Alphabet Inc GOOGL, while raising the price target from $940 to $950, saying that Google is positioned to emerge stronger in case of a slowdown in the global business cycle.

Google is growing five to six times faster than other media incumbents. While the combined advertising businesses of the five largest domestic media companies grew 4 percent in 4Q, Google’s O&O Websites revenue grew 20 percent in 4Q, up from 16 percent growth in 3Q and 13 percent growth in 2Q, analyst Rob Sanderson noted.

Google continues to gain significant share of the global advertising pie and the sustainability of its strong position compared to traditional medial players is “almost unquestionable.”

“Currently, GOOGL is trading at 18x current year EPS less cash vs. the average media comp at 19x,” the MKM Partners report noted, while adding that the current valuation embeds a $3 billion drag on the operating profit from the Other Bets, implying a 2-point lower multiple for the overall company.

Sanderson believes that Venture Capital Funds offer the most appropriate valuation comparison for Other Bets, but the latter has an advantage in terms of technical resources, infrastructure, competitive intelligence and management experience of the parent company.

Google’s websites revenue acceleration is likely to continue and be driven by mobile search. The EPS estimates for 2016 and 2017 have been raised by 8 percent and 9 percent respectively.