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:
(AAPL),
(MSFT),
(AMZN), and
(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.
Write to andrew.bary@barrons.com