3 Reasons You Should Buy Alphabet Stock in 2017
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3 Reasons You Should Buy Alphabet Stock in 2017

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Alphabet Inc. (GOOGL, GOOG) had a respectable performance for the past year, gaining some 16%. Although, it did lag behind one of its fiercest rivals, Facebook Inc. (FB), whose stock logged a return of 34%. And both paled in comparison with Amazon.com, Inc. (AMZN), which mustered 40% gains for its shareholders.

Of course, for Alphabet Inc, the company will not have the same kind of high-growth rates of past. The revenue base is simply too massive.

This does not mean the stock will somehow get stuck, however. If anything, there are some positive long-term drivers that should benefit shareholders in the coming year and beyond. Let’s take a look at three:

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Stock Driver #1 — Tech Megatrends

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While the online advertising industry has been around for over two decades, there remains lots of room for growth. According to IDC, the global spending is forecast to go from $177.3 billion in 2015 to $315.7 billion in 2020. Some of the key drivers include: the ubiquity of internet access and smartphones, the advantages of tracking/analytics, personalization, and the increased use of video.

All this is certainly good news for holders of GOOGL stock. Consider that the company derives about 90% of its revenues from online advertising. More importantly, Alphabet has a tremendous platform, which includes seven properties that have over a billion users (the main Google property, YouTube, Gmail, Maps, Chrome, Android and Play).

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The result is that the company is getting an outsized share of the online ad opportunity. In the latest quarter, GOOGL reported a 20% increase in revenues to $22.45 billion. Google’s CEO, Sundar Pichai, said: “Our services are prime time for the mobile world.” After all, Alphabet Inc controls a whopping 95% of the mobile search market.

SEE ALSO FROM KIPLINGER: A Cheap Way to Own Tech Stocks

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Stock Driver #2 — Bold Innovation

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From inception, the DNA of GOOGL has been about pushing the envelope on innovation. Granted, sometimes there have been embarrassing flops. But hey, this is critical for achieving success (keep in mind the countless times Thomas Edison failed until he figured out the light bulb).

So yes, the company has continued to release innovative products. Some of the recent ones include the Pixel phone, Duo (a video chat app), Google Home (a voice-activated speaker) and Allo (a smart messaging app).

But perhaps the technology that has the most potential to be transformative for GOOGL stock is artificial intelligence. The company’s long history of building and leveraging massive databases is definitely a huge advantage (the knowledge base consist of over 70 billion facts about people, places and things).

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Basically, with AI, the opportunity is to make technology natural and seamless — not something you need to activate, enter information into or boot up. In other words, the systems will crunch data to learn and adapt.

Oh, and the monetization could be enormous. As InvestorPlace.com’s Aaron Levitt recently wrote:

“In the end, Alphabet is setting itself up to be the absolute king of data collection. Moving beyond the desktop and mobile phone and into our daily lives is the next step in how it will better compete and drive advertising sales. This shift is the next evolution in its business model.”

SEE ALSO FROM INVESTORPLACE: 3 Reasons Amazon.com Stock Is About to Catch Fire

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3 Reasons You Should Buy Alphabet Stock in 2017 | Slide 4 of 4

Stock Driver #3 — Financials and Valuation

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Alphabet Inc. is a cash machine.

In the latest quarter, operating cash flows came to a hefty $9.8 billion. In all, there is $83.1 billion in the bank — of which $50 billion is overseas. Basically, if Donald Trump enacts policies on repatriation, Alphabet Inc will be in a position to bring home these foreign balances, which can be used for R&D, acquisitions and buybacks.

But, with the forward price-earnings multiple just under 20, the valuation on GOOGL stock is also reasonable. To put this into perspective, the S&P 500 is at about 19 times forward earnings. Yet, many of the mega caps in the index do not have the potential long-term growth rates of Alphabet stock.

This article is by Tom Taulli of InvestorPlace. As of this writing, he held none of the aforementioned securities.

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