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Momentum Turns
in Alphabet’s Favor

Occasionally we’re willing to overlook a stock’s less-than-stellar Quadrix® scores; Alphabet (GOOGL) is one such exception. Although Alphabet earns an Overall score of just 64, we rate the stock a Focus List Buy and a Long-Term Buy due to its strong recent results, track record for generating cash, and growth prospects, says Richard Moroney, editor of Dow Theory Forecasts, www.dowtheory.com.

“The shares rallied after Alphabet reported 32% higher adjusted earnings per share on 26% revenue growth for the June quarter. Both metrics comfortably topped consensus estimates. Advertising revenue grew 24% to $28.09 billion last quarter, and management sees a long runway for future growth. Alphabet says more than 90% of commerce is still done offline, leaving plenty of opportunity for businesses to shift their ad budgets toward the Internet.

Additionally, sales rose 37% to $4.83 billion for the business unit encompassing cloud services, application store, smartphones, and smart speakers. In particular, the cloud business is gaining momentum, securing contracts with Domino’s Pizza, PricewaterhouseCoopers, and Target.

Analysts and investors alike seemed to shrug off concerns about the EU’s record $5.06 billion fine involving the Android operating system, handed down in July. Ultimately, the decision invites more competition from other software makers, such as Microsoft (MSFT) and Amazon.com (AMZN).

Converting Hope into Profit

Beyond its legacy online-advertising and budding cloud businesses, Alphabet dabbles in what could seem like indulgent flights of fancy: self driving cars, delivery drones, and balloons that beam the internet to remote regions of the world.

It can be difficult to keep track of all of Alphabet’s developmental and commercial products. Artificial intelligence, or machine learning, seems to be the one strand holding many of these dissimilar initiatives together. Alphabet is trying to leverage its AI investments across different businesses.

Google Assistant has sprouted out of the company’s push into machine learning. The service is being paired with about 5,000 home devices like doorbells, dryers, and refrigerators. It will be available in more than 30 languages and 80 countries by end of 2018.

Alphabet uses machine learning to help automate the manual process of building text ads and then identifying the best-performing ads in real time. With its local mobile-search queries up 50% over the past year, Alphabet is also coordinating a new advertising campaign with its mapping application, aimed at driving foot traffic to businesses when users are nearby.

Making Progress

Alphabet’s past execution for commercial products has been spotty. However, a few of its projects are making encouraging progress. The Waymo unit has begun a trial that drives shoppers to Walmart (WMT) stores in autonomous cars to pick up online orders. Project Loon (internet beaming balloons) and Project Wing (drone delivery) have moved into the other bets unit after reaching milestones toward commercial viability.”

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