Which Google Stock Is A Better Buy: GOOG Or GOOGL?

May 24, 2021 2:13 PM ETAlphabet Inc. (GOOG), GOOGL60 Comments65 Likes

Summary

  • Alphabet is a solid company, combining a great market position, strong growth, and a not-too-expensive valuation.
  • There are two types of publicly traded shares, class A shares and class C shares.
  • Which one is the better pick? We will look at the factors that investors should know about before making an investment.
  • I do much more than just articles at Cash Flow Kingdom: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

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Article Thesis

Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) is a leading technology company that combines a highly profitable core business centered around Search, YouTube, etc. with a range of high-potential, higher-risk ventures, such as Waymo. This combination results in an attractive growth outlook, and at the same time, shares are not ultra-expensive when earnings growth is factored in. Investors that think about buying into the company may want to look at the differences between GOOG and GOOGL to decide which of these is a better fit for their personal needs.

What Is The Difference Between Class A or C Shares?

In short, the two different tickers are associated with two different types of shares. GOOG is the ticker for Alphabet's C shares, whereas GOOGL is the ticker for Alphabet's A shares. This share structure, with different types of shares, which, in a similar way, also exists for other companies, was created in order to allow for voting rights and capital rights to be split from each other. When a high-growth tech company that heavily relies on its founding personnel requires additional cash to grow the company, execs may want to make sure that voting rights rest with the initial founders, in order to allow them to follow through on their vision. This may require the issuance of a new type of share class that allows the company to access fresh capital without diluting the voting power of key people inside the company.

There is, in fact, a third type of share, Alphabet's B shares, which are not publicly traded, as they are mostly held by the company's founders Sergey Brin and Larry Page, and by Eric Schmidt, who had been the company's CEO for a long time. B shares have, unlike A shares, 10 votes per share, versus one voting right per share for A shares, and zero voting rights per share for C shares.

What Is The Difference Between GOOG And GOOGL?

Apart from the voting rights differences that are explained by the different share classes (A shares and C shares), there are a couple of other differences between GOOG and GOOGL investors should note.

First, GOOGL shares are slightly more liquid than GOOG shares, with average daily trade volumes of 1.6 million and 1.4 million. For a company as large as Alphabet, where even the less liquid share class is traded very frequently, this isn't a very large factor that investors should consider in normal times. During times when markets are very harsh or illiquid due to any reason, the somewhat higher liquidity of GOOGL, relative to GOOG, could still be a positive factor, as this could allow investors to enter or exit positions at slightly more advantageous prices, on average. This is why, generally, more liquid shares receive a liquidity premium from the market, although that can be offset by other factors -- which is the case with Alphabet. The increased liquidity can likely be explained by the fact that there are more A-class shares outstanding, relative to C-class shares, with a difference of ~15%.

Why Is GOOG More Expensive Than GOOGL?

The biggest, and for many investors, most important difference between the two tickers is the price differential between GOOG and GOOGL. GOOG is more expensive than GOOGL, despite the fact that both types of shares are entitled to the same share of the company's earnings. This difference has not been static over the years, however. Indeed, GOOG shares actually were cheaper than GOOGL shares for most of the time, and this has only changed recently:

Chart
Data by YCharts

The fact that GOOGL -- which has voting rights -- usually was a little more expensive than GOOG, which has no voting rights, makes sense. Investors did not value the voting rights too much, but they still put a premium of a couple of percentage points on that. The fact that, right now, GOOG is trading at a premium, even though GOOG does not have any voting rights, and thus is the "inferior" type of stock, is surprising at first sight.

The best explanation, I believe, for this somewhat unusual pattern is that Alphabet's buyback program distorts the price differential between the two types of shares. In April, Alphabet announced a new $50 billion buyback program for its C shares, i.e. GOOG, whereas there will be no buybacks for GOOGL. This buyback activity has distorted the supply-demand picture, at least to some degree, and explains why GOOG shares are currently slightly more expensive than GOOGL shares. It seems very much possible that the current premium of GOOG over GOOGL fades away over time, as the initial buyback frenzy cools down. Since investors did, in the past, value GOOGL a little more due to its voting rights, it would not be too much of a surprise if that eventually occurs again, although I wouldn't speculate on that via any type of arbitrage trade. I do, however, believe that GOOGL shares are the more attractive choice among the two types of stocks right now. I personally do not value GOOGL's voting rights too much, as I don't believe that those are very important for most retail investors. But the fact that GOOGL trades at a small discount to GOOG, which makes its shares cheaper relative to the earnings and cash flows you are entitled to, is a major argument for choosing GOOGL over GOOG, I think.

An Attractive High-Growth Company At A Reasonable Price

Alphabet is a tech giant and has been one for quite some time, but that does not mean that its growth has slowed down. Instead, Alphabet continues to deliver highly attractive growth, driven by macro tailwinds such as digitalization, personalized advertising, streaming, etc.

Alphabet grew its revenue by 35% during the most recent quarter, which is a highly attractive growth rate, and on the back of that revenue growth and some operating leverage, Alphabet's operating earnings more than doubled on a year over year basis. With earnings per share of $26.30, the company easily beat estimates and hit a new record profit easily. On the back of those strong results, analyst estimates for this year's EPS and for the following years' EPS have risen quite a lot in recent weeks:

Chart
Data by YCharts

Right now, analysts are forecasting earnings per share of $87.60 for the current year, and EPS of $93 and $109 for the next two years. Forecasted earnings growth for next year, at just 6%, seems rather low, I believe, but maybe analysts are trying to factor in that the comparison to a likely very strong fiscal 2021 will not be an easy one.

Based on current forecasts, Alphabet trades at 26 times this year's earnings, which doesn't seem very expensive for a company that grows at a 35% clip. Likewise, at 21 times 2023's earnings, Alphabet does look moderately valued, or even undervalued, as well. Shares are significantly cheaper than those of some other high-growth names, including the likes of Tesla (TSLA), Netflix (NFLX), or Salesforce (CRM).

Since Alphabet's market position in its core Search business seems relatively secure, it seems likely that the company will grow its sales in that segment in line with the market's growth. Some less certain, but potentially high-return projects such as the autonomous driving venture Waymo add some spice to Alphabet's growth outlook, and could potentially lead to significant earnings growth a couple of years down the road. Overall, I rate Alphabet a very solid business with a strong market position and compelling growth, and its shares do not seem too expensive at all. I wouldn't call them a screening buy right here, and tech mega-caps Facebook (FB) and Alibaba (BABA) seem even more attractively priced to me, but Alphabet does also not at all look like a sell to me.

Should You Buy GOOG Or GOOGL?

If you agree that Alphabet is a solid pick, and if you deem the current valuation sufficiently attractive, then you have to decide which of the two types of stocks to put your money in. I personally think GOOGL is the better choice right here, as it is cheaper and there is potential for the GOOG/GOOGL ratio reverting to the historic pattern, in which case GOOGL would be more attractive than GOOG. If, however, you want to speculate that current or future buyback programs will make GOOG even more expensive relative to GOOGL, then GOOG would be the better choice.

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Disclosure: I am/we are long GOOGL, FB, BABA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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