A quirk in the relationship between the two publicly traded classes of
stock has resulted in the nonvoting shares, whose ticker is GOOG, trading at a premium of 3% to the voting stock, whose ticker is GOOGL.
For investors bullish on the outlook for the search giant, the class A voting stock may be the better bet. Alphabet’s nonvoting class C shares (ticker: GOOG) were up $4.21, to $2,578.59, on Tuesday, a premium of about $77 a share to the class A voting shares (GOOGL), which were down $3.33, to $2,501.82.
At the start of the year, voting shares traded at a small premium and the two classes were close to parity on March 31. The spread got as wide as over $100 a share in June.
Alphabet stock has been on a roll this year, with the nonvoting shares up 47% and the voting stock rising 43%, the best showing among the five megacap tech stocks:
(FB) are the others.
Evercore ISI analyst
remains bullish on Alphabet, arguing that the company is capable of annual revenue growth of 15% to 20% in the next three years and 18% to 23% yearly gains in earnings per share, with the stronger earnings growth driven by stock buybacks.
“Alphabet can sustain premium growth for the foreseeable future,” Mahaney says. He has an Outperform rating and a price target of $2,825.
Mahaney says it “makes a lot of sense” for investors to consider the voting stock. He notes, however that “the founders, Brin and Page, control 85% of the class B stock and 51% of the vote; I’m not sure what voting stock really means at a company like Alphabet.”
He is referring to
who own the bulk of the nontraded class B supervoting stock with 10 votes each. 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.
One reason that the class C stock could trade at a premium is that Alphabet’s stock buyback program involves the nonvoting stock.
Alphabet’s valuation has risen this year, and the stock now trades for nearly 30 times projected 2021 earnings of about $88 a share.
The effective valuation, however, is lower when stripping out the annual losses in the company’s nascent 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 that some investors are hopeful that 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 Alphabet investment story doesn’t hinge on that, given a strong outlook in search as well as monetization opportunities in Google Maps and other businesses. Then there is Alphabet’s Waymo, the leader in autonomous driving technology, and the valuable YouTube platform.
The analyst and many investors are encouraged that Alphabet has stepped up its share repurchase program, buying back a record $11.4 billion in the first quarter. The buyback over the past four quarters have totaled about $34 billion, he notes.
The buybacks have been sufficient to offset the company’s heavy stock-based compensation and shrink Alphabet’s share count by about 2% over the past year. Mahaney thinks Alphabet can further increase its repurchases to $15 billion a quarter, or $60 billion annually.
The company continues to sit on a large net-cash balance of $121 billion. “Alphabet has excess cash and given the regulatory environment, what can it buy?” Mahaney says. “Alphabet could lean in and really take the share count down.” He notes that Apple’s higher valuation has reflected in part its aggressive stock repurchase program.
There is still a lot of growth left in Alphabet, and the voting shares could be the best way to play it.
Write to email@example.com