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Google Parent Navigates Shift Toward Mobile Computing With Aplomb

We plan to modestly increase our fair value estimate for wide-moat Alphabet.

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 Alphabet Inc (GOOG) (GOOGL) posted third-quarter results that were modestly ahead of our internal forecast, and mostly in line with our investment thesis tied to several themes including expanding operating margins, success in mobile advertising, and appropriate capital allocation. Management is clearly trying to communicate a more coherent message about its capital allocation strategy, as the company announced a plan to return more than $5 billion back to shareholders through a share buyback. (The precise amount is $5.09902951 billion. The square root of 26 is approximately 5.09902951 – and there are 26 letters in the English alphabet.) Although the buyback does not have a material effect on our valuation, we plan on increasing our fair value estimate roughly 5% as we revise our financial model to account for cash earned. We are also maintaining our wide moat rating, as the company's robust assets across desktop, mobile and video should deliver excess returns on capital for the next 20 years.

Revenue growth and margins across Alphabet's primary advertising ("Google") businesses were solid, as revenue grew 13% (23% on a constant currency basis), while operating margins improved 300 basis points to 25.2% after adjusting for a nonrecurring impairment charge in 2014. We believe that Google's control of foundational assets including Android and YouTube are allowing the company to enjoy similar economics and market share in digital advertising, even as consumers are spending an increasing amount of time on mobile devices. Google has 1.4 billion Android users, more than 1 billion Google Play users, and more than 1 billion YouTube users. Individually, each product has wide moat characteristics, but Google's ability to integrate customer data across these platforms and tie to search behavior is robust and defensible, in our view. We see no signs that the shift toward mobile computing is disrupting Google's business.

Rick Summer does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.