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Merrill Lynch Remains Bullish on Google Inc (GOOGL) Despite Money-Losing Endeavors

By Howard Kim

Apart from Google Inc’s (NASDAQ:GOOGL) core internet business, which is generating all the company’s cash, only a few of its other businesses are making money. Analyst Justin Post, Bank of America Merrill Lynch, maintained a Buy rating on Google with a $750 price target after he estimated the amount lost by Alphabet’s non-internet businesses using two separate methodologies. Alphabet is a new, independent company tied to Google that will explore the company’s more innovative and not necessarily profit-generating endeavors.

In the first methodology, Post has assumed operating margins of 53% for Google’s core business (just like in 2010 when Google was not making any investments in other businesses). As per this methodology, the company could be losing as much as $4 billion each year.

Post’s second methodology, which is based on job post listings, projects annual losses from the non-internet businesses of up to $2.7 billion each year. Post has analyzed Google’s job postings for the past 5 years and has estimated that out of the total new recruits, only 16% are working on Google’s core internet business.

In either case, both these numbers suggest that Google is losing billions of dollars each year. On the backdrop of Google’s recently-announced organization structure, Post has warned about expenses getting out of control. The analyst said, “While Larry Page’s blog post highlighted a thoughtful process in capital decision making, the risk we see is that investment spend at other Alphabet companies is about to accelerate under the new structure.”

Overall, Post expects Google’s new Alphabet operating structure to be a positive for the company. According to Post, the new operating structure moves Google from just an Internet company to an “all things technology” player. Just like other analysts, Post sees this move as much more than simple financial reengineering.

When looking at Google’s stock from a sum-of-the-parts valuation, Post values each share of Google’s core business at $740. When he adds other values, such as Google’s cash balance of $85 per share and the other loss-incurring businesses, the analyst sees an upside of over 34% from Google’s current stock price. Post’s views are similar to that of many other analysts who see Google’s new operating structure as a positive. According to TipRanks, Post is one of 29 analysts who have voiced bullish sentiments on Google in the last three months. At the same time, three analysts are neutral on Google but none are bearish. The average 12-month price target between these 32 analysts is $771.57, marking a 16% potential upside from current levels.

Justin Post is a top-ranked analyst with a success rate of 66% recommending stocks with an average return of 18.3% when measured over a one-year horizon and no benchmark. Post has rated Google 25 times since 2009, earning a 74% success rate recommending the Internet giant with a +36.7% average return per Google rating.