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Is Restructuring The Answer For Google Inc (GOOGL)?

By Dafne Samuel

Early this month, Silicon Valley based Google Inc (NASDAQ:GOOGL) announced plans to restructure the company and form a new entity called Alphabet Inc, with Google as its main subsidiary. The company’s founders say the main reason behind this decision is they can focus on more ambitious projects. Google Co-founder and CEO, Larry Page says that the new parent company Alphabet will make the company’s activities “cleaner and more accountable”.

Google’s stock jumped nearly 5% following announcement on Aug 10 and most Wall Street analysts view this as a positive for the company.

Google will now be run under new CEO Sunder Pichai. This division will include internet outlets like Ads, search, Maps, YouTube, Chrome, Apps and Android.

Other divisions under Alphabet will include Google X (research and development lab), Calico (health focused research and development), Nest (smart home ware), Google Fiber (superfast broadband and TV- on- demand service), and Google’s two investment arms (Google Ventures and Google Capital). Robotics will continue to remain a separate entity of Alphabet.

Executives of the former company will be responsible for running Alphabet. This will help establish accountability within the company and identify the more profitable divisions within the new entity.

However, there may be a few risks lurking for company as there is risk of executives running to the founders for the necessary funds to run their respective departments. There is also a risk of them competing with each other rather than cooperating and working together as a team.

Many analysts weighed in on Google following the restructuring announcement with the majority believing it will bring transparency to the company.

RBC analyst Mark Mahaney reiterated an Overweight rating on Google on August 11, citing the company will provide four vital components to investors: consistent revenue growth, stable margins, cash back and transparency.

Overall, Mark Mahaney has a 63% success rate recommending stocks and a +21.6% average return per recommendation when measured over a one-year horizon and no benchmark. He has rated Google 36 times since 2009, earning a 77% success rate recommending the company and a +32.2% average return per rating.

Similarly on August 11, Stifel’s Scott Devitt upgraded the stock to Buy as he sees this change giving more clarity around the core business. He also sees this move as a step towards creating a ‘Berkshire Hathaway if the Internet’.

On an average, Scott Devitt has a 62% success rate recommending stocks and a +19% average return per rating when measured over a one- year horizon and no benchmark. He has rated Google 15 times since 2009, earning a 63% success rate rating the stock and a +11.1% average return per rating.

Out of 31 analysts polled by TipRanks within the past three months, 28 analysts are bullish on Google and 3 are neutral. The average 12-month price target for the company is $773.29, marking a 17.31% potential upside from where shares currently reside.