Google Inc , as it was known is now a subsidiary under the newly-formed Alphabet. Google (read Alphabet) announced its decision to create a parent company named “Alphabet” on Monday and the stock has been rising since. Google’s decision to become Alphabet is more than just a name change; it is a grand move to endear the firm with Wall Street and investors.
Google has grown from being a search engine that sells ads to a beehive with a range of products from Gmail, to YouTube, Android, Google Maps, Self-driving cars, and Internet balloons among other things.
In introducing Alphabet, Google’s leaders quoted words from the original founders’ letter from 11 years ago. They said, “Google is not a conventional company. We do not intend to become one”. The firm makes “smaller bets in areas that might seem very speculative or even strange when compared to our current businesses.”
Google is a black sheep on Wall Street
Google makes money but Wall Street and investors are far from happy with the business. For one, they believe that Google needs to trim down its expenses – especially the overhead costs that come with its large workforce. Before the firm released its second quarter (Q2 2015) earnings, analysts were mostly of the opinion that Google must show a concerted effort to cut costs going forward.
Secondly, Google has been involved in lot of so-called “Moonlight” projects that look nothing more than a shot in the dark to investors. Google Glass is still fresh in the mind of investors; the is a wild ambition to increase human lifespan also looks crazy.
Investors think that Google would be better off sending them fat checks in the form of dividends instead of burning the money on projects that might never make it to the market.
Courting Wall Street with Alphabet
The new corporate structure that Google , has adopted is a subtle move to show Wall Street that the firm is not burning cash on stupid projects. With the new structure, each business segment will have its own CEO and business plan.
The market can easily know how Google’s core business is faring, how much of Google’s money is going to Moonlight projects and the cost-benefit analysis of such projects.
The market is already pleased with the new structure and analysts are positive about where Google is heading. Leading the bullish analyst view on Google are the words of analysts from Stifel who raised the stock from a “Hold” rating to a “Buy” rating.
They have an $850 price target on the stock. The analysts say, “We believe this combination leaves the possibility for shares to exceed the S&P 500 return for many years on the back of this new operating structure.”
Analysts at Cowen and Co are also bullish as they place an “Outperform” rating on the stock. They also raised their price target from $775 to $840. In their words, the change from Google to Alphabet is “is a significant move as it 1) Aligns mgmt. more closely to business lines; 2) Increases transparency into Core Google , (Search, YouTube, etc) and Non-Core (Fiber, etc.), highlighting higher Core profits”.