Alphabet Is One of Barron’s Top Stock Picks for the New Year. Here’s Why.

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This article is an excerpt from Barron’s 10 favorite stocks for 2021. To see the full list, click here.

Alphabet is recovering nicely from a pandemic-related hit to advertising earlier this year. Revenue was up 15% in the third quarter, and it stands to benefit in 2021 as ad categories like travel improve. The stock looks appealing even after a 31% rise in the stock so far this year, to $1,757 a share.

Alphabet (ticker: GOOGL) is a technology conglomerate. It has a powerhouse group of businesses, including its lucrative core search operation, YouTube, cloud computing, Android, Waze, and Waymo, the leader in autonomous vehicle technology.

Alphabet / GOOGL

E=Estimate

Source: Bloomberg

The stock trades for 28 times projected 2021 earnings of $62 a share. The price/earnings ratio is overstated because Alphabet’s less-mature and valuable Other Bets businesses, including Waymo, are losing about $4 a share annually and the company is sitting on about $118 billion of net cash, or $170 a share.

The adjusted 2021 P/E of about 24 is close to a market multiple. That is inexpensive for one of the great global franchises—one that RBC Capital Markets analyst Mark Mahaney sees capable of “sustainable mid- to high-teens” growth in annual earnings per share.” He has an Outperform rating and $1,900 price target.

Antitrust action is a potential danger, but Adam Seessel, the head of Gravity Capital Management, an Alphabet shareholder, isn’t worried. “Regulation and/or a breakup would actually improve share-price performance, just as it did with Rockefeller’s Standard Oil a century ago,” he tells Barron’s. “Forced to come out from behind Mother Search’s apron, undermonetized platforms like YouTube and Android would be forced to stand on their own, make money, and drive shareholder value.”

Write to Andrew Bary at andrew.bary@barrons.com