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In May, a new Google Store opened in the Chelsea area of Manhattan.
Bloomberg/Victor J. Blue
There is an anomaly in the relationship between the two publicly traded classes of securities.
Alphabet
The nonvoting shares, which trade under the ticker GOOG, now trade at a 3% premium over the voting stock, which trades under the ticker GOOGL.
The class A voting shares may be a better choice for investors who are enthusiastic on the search giant’s prospects. On Tuesday, Alphabet’s nonvoting class C shares (ticker: GOOG) rose $4.21 to $2,578.59, a premium of nearly $77 per share over the company’s voting class A shares (GOOGL), which fell $3.33 to $2,501.82. Voting shares were trading at a tiny premium at the start of the year, and the two classes were close to parity on March 31. In June, the spread reached over $100 per share. Alphabet stock has been on a tear this year, with nonvoting shares up 47% and voting shares up 43%, the best performance among the five megacap tech stocks:
Apple
(AAPL),
Microsoft
(MSFT),
Amazon.com
(AMZN), as well as
The others are (FB). Evercore ISI analyst Mark Mahaney is bullish on Alphabet, claiming that the business is capable of annual revenue growth of 15% to 20% and annual profits per share growth of 18% to 23% in the next three years, with the faster earnings growth driven by stock buybacks.
According to Mahaney, “Alphabet can continue premium growth for the foreseeable future.” He has an Outperform rating and a $2,825.25 price target. According to Mahaney, investors should examine the voting stock since it “makes a lot of sense.” “The founders, Brin and Page, hold 85 percent of the class B stock and 51 percent of the vote,” he points out, “and I’m not sure what voting stock actually means for a business like Alphabet.” Sergey Brin and Larry Page, who control the majority of the nontraded class B supervoting shares and each have ten votes, are the people he’s referring to. The voting stock class A has one vote per share, while the voting stock class C has no votes. There are approximately 300 million class A shares and 323 million class C shares outstanding. Alphabet’s stock repurchase program includes the nonvoting stock, which might cause the class C stock to trade at a premium. Alphabet’s stock has surged in value this year, and it currently trades for about 30 times estimated earnings of around $88 per share in 2021. When annual losses of around $5 a share in the company’s embryonic Other Bets division, as well as losses at Google Cloud, which competes against Amazon’s and Microsoft’s cloud-computing juggernauts, the effective worth is lower. Some investors believe Alphabet can change the cloud industry from a “two-horse, one-pony race” to a “three-horse race,” according to Mahaney. He isn’t convinced, but believes the Alphabet investment story isn’t dependent on it, given the company’s excellent search prospects and monetization opportunities in Google Maps and other businesses. Then there’s Alphabet’s Waymo, the industry leader in self-driving technology, and YouTube’s important platform. The analyst and many investors are encouraged by Alphabet’s increased share repurchase program, which saw the company buy back a total of $11.4 billion in the first quarter. He estimates that the buybacks have reached around $34 billion over the last four quarters. Over the last year, the buybacks have been enough to offset the company’s high stock-based pay and reduce Alphabet’s share count by around 2%. According to Mahaney, Alphabet can boost its repurchases to $15 billion per quarter, or $60 billion per year. The corporation still has a substantial net cash position of $121 billion. “What can Alphabet acquire with its surplus capital, given the regulatory environment?” Mahaney explains. “Alphabet might lean in and significantly reduce the number of shares outstanding.” Apple’s greater valuation, he says, is due in part to its aggressive stock repurchase program. Alphabet still has a lot of room for development, and voting shares may be the best way to play it. Andrew Bary can be reached at andrew.bary@barrons.com./n
