A new Google Store opened in Manhattan’s Chelsea neighborhood in May.
Victor J. Blue/Bloomberg
A quirk in the relationship between the two publicly traded classes of Alphabet stock has resulted in the nonvoting shares trading at a premium of 3.1% to the voting shares.
For investors bullish on the outlook for the search giant, the class A voting stock looks like the better bet. Alphabet’s nonvoting class C shares (ticker: GOOG) closed at $2,591.49 on Friday, a premium of about $81 a share to the Alphabet’s nonvoting class C shares (GOOGL), which closed at $2,510.37.
At the start of 2021, the voting shares traded at a small premium and were close to parity on March 31. The spread widened to more than $100 a share in June.
Alphabet stock has been on a roll this year, with the nonvoting shares up 48% and the voting stock up 43%, the best showing among the five megacap tech stocks: Apple (AAPL), Microsoft (MSFT), Amazon.com (AMZN), and Facebook (FB) are the others.
Evercore ISI analyst Mark Mahaney remains bullish on Alphabet, arguing that the company is capable of annual revenue growth of 15% to 20% in the next three years and yearly gains of 18% to 23% in earnings per share, driven by stock buybacks. He has an Outperform rating and a price target of $2,825 on the stock.
Mahaney says it “makes a lot of sense” for investors to consider the voting stock. The class A voting stock has one vote per share and the class C shares have no votes. There are about 300 million class A shares outstanding and 323 million class C shares. (Co-founders Sergey Brin and Larry Page control Alphabet through ownership of the bulk of the nontraded class B supervoting stock, which has 10 votes per share.)
Alphabet’s valuation has risen this year, and the stock now trades for nearly 30 times projected 2021 earnings of $88 a share.
The effective valuation, however, is lower when stripping out the annual losses in the company’s Other Bets business of about $5 a share, as well as losses at Google Cloud, which competes against Amazon’s and Microsoft’s cloud-computing juggernauts.
Mahaney says some investors hope Alphabet can turn the cloud business from a “two-horse, one-pony race into a three-horse race.” He’s not convinced, but says the investment story doesn’t hinge on that, given a strong outlook in search and monetization opportunities in Google Maps and other businesses. Then there is Alphabet’s Waymo, the leader in autonomous-driving technology, and its valuable YouTube platform.
Many investors are encouraged that Alphabet has stepped up its share-repurchase program, buying back a record $11.4 billion in the first quarter, Mahaney notes. (One reason that the class C stock could trade at a premium is that Alphabet’s stock-buyback program involves the nonvoting stock.)
Alphabet continues to sit on a large net-cash balance of $121 billion. Mahaney thinks the company can increase its repurchases to $15 billion a quarter, or $60 billion annually. He notes that Apple’s higher valuation has reflected in part its aggressive stock-repurchase program.
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