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Stocks  | April 19, 2019

Most investors still know it as Google, even though the internet search giant reorganized as Alphabet (GOOGL) in August 2015. Google stock has gained more than 85% since the company formed Alphabet, a holding company.

The move separated Google's core internet advertising business from so-called moonshots, such as autonomous vehicles. Google's strength in artificial intelligence, though, spans the Google Cloud Platform, YouTube and other bets like self-driving cars and the Verily Life Sciences unit.

Despite its enormous size, Google continues to notch revenue growth well above 20%. It still dominates in digital advertising, along with Facebook (FB), though (AMZN) looms as a new rival in digital ads.

The trouble is, Google's profit margins remain an issue amid high investments in cloud computing, YouTube, and other areas. It does not break out financials for YouTube or the cloud-computing business.

Stiffer regulation also is a worry for Google as well as other internet companies that gather consumer data. Worst-case, Google would restructure under regulatory pressure.

Google Stock: Breaking Out And In Buy Zone

Google stock corrected in late 2018 like many technology companies amid worries over a slowing global economy. However, Google stock has gained 27% from its December low, as its sales and profit growth accelerated in its fourth-quarter earnings report.

With the correction and rebound, Google stock has formed a saucer-with handle chart patternwith a buy point of 1,236.54. Google was breaking out from that base on Wednesday, gaining 1% to 1,244 in just average volume. Breakout volume should be at least 40% above average, indicating aggressive buying among institutional investors.

That makes Google technically a buy, but not necessarily compelling.

The stock is long past its IPO glory days when it gained nearly 800% in just over three years. In recent years, Google typically keeps pace with the S&P 500, punctuated by brief periods of outperformance. That makes Google an ideal candidate for taking 20% profits after a breakout. Based on its latest buy point, the 20% profit target stands at 1,483.85.

Another technical blemish is Google's weak relative strength line, which tracks its stock performance vs. the S&P 500. Google's RS line sits below the level at the beginning of its most recent base. Typically the strongest stocks' relative strength lines are either confirming or leading a stock's price into new high ground. The RS line is in blue in the chart below.

Also note that Google will report earnings on April 29. You should have a profit cushion of at least 5% if you intend to hold through earnings.

Google Stock Fundamentals: Margin Trend A Worry

Google 2019 revenue is expected to rise nearly 20% to $163.8 billion, slowing from 2018's 23% sales growth. In 2020, revenue is projected to climb nearly 18% to $192.8 billion. Given Google's size, that's still impressive.

Google profit margins remain a concern. Operating margin fell to about 21% in the December 2018 quarter, down from 26.5% in the first quarter of 2017.

Capital spending rose to 18% of revenue in the December 2018 quarter, up from 10% two years earlier.

Overall costs jumped 26% to $31 billion in the December quarter amid investments in cloud, YouTube and other areas. Google missed analyst estimates on operating margins in three out of four quarters in 2018.

Analysts polled by Thomson Reuters see Google 2019 earnings growing 7% to $46.88 a share, up from $43.70 last year. In 2020, analysts project 16% profit growth to $54.49. Some analysts are talking about rating Google on earnings before interest, taxes, depreciation and amortization, or EBITDA, rather than earnings per share.

Google Stock: Key Financial Metrics To Watch

Aside from profit margins, analysts generally track a few other key Google financial metrics.

Revenue from so-called Google Properties is closely watched. That includes ad revenue from Gmail, Google Play and YouTube. Google Maps has been mostly ad-free. But the company is introducing new ad products for Google Maps.

Another Google financial metric relates to internet search. Cost per click, or CPC, on Google Properties has declined. Falling CPC is tied to an ongoing shift to mobile search and the growth of YouTube.

Then there's Google's traffic acquisition costs, or TAC. That's what it pays to partner websites to carry ads. TAC has been going up as Google relies more on partner sites and third-party apps to gain traffic and generate mobile advertising revenue.

TAC jumped in early 2018, probably tied to a contract renewal with Apple (AAPL). But TAC growth moderated later in the year.

In early 2018, Google changed accounting methods. It switched to reporting earnings on generally accepted accounted principles, or GAAP. GAAP earnings include stock-based compensation. The move added credibility to Google earnings.

Factoring In Waymo, YouTube In Google Stock Valuation

A key question for investors is how much self-driving car project Waymo and "other bets" should figure in valuation.

In early 2018, some analysts projected Waymo's long-term valuation in a range of anywhere from $75 billion to $125 billion.

Expectations for autonomous vehicles, though, have been lowered recently. Google may license its autonomous vehicle technology.

YouTube is also a wild card of sorts, despite its global reach. It's a big contributor to ad revenue. But its profitability amid content investments is unknown.

Another question is the profitability of Google's hardware business. It's taking on Apple in smartphones and Amazon in smart-home appliances.

Google's cloud computing business, meanwhile, lags rivals Amazon and Microsoft (MSFT). Google brought in a former Oracle (ORCL) top executive to improve cloud sales in the corporate market.

The company has increased its buybacks. Google ended 2018 with $109 billion in cash and securities. Like Apple, Google has plenty of cash to make acquisitions or increase shareholder returns.

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