July 12, 2021 BARRON’S M3
skepticism about how quickly Citigroup can
correct those issues and at what cost, the
Street generally agrees that with Fraser at
the helm, the bank has a renewed sense of
urgency to streamline its operations.
Citi’s cheap valuation makes up for a lot
of those issues, says KBW analyst David
Konrad. “We are assuming coverage of Citi-
group with an Outperform rating partly due
to a discounted valuation but also due to the
negative sentiment on the stock,” he writes.
Konrad sees Citi stock trading at $85 a share,
almost 25% above Friday’s close.
It may take time, but Citi stock should
pay off for patient investors.
— Carleton English
Alphabet Stock at a Discount
A quirk in the relationship between the two
publicly traded classes of Alphabet stock
has resulted in the nonvoting shares trading
at a premium of 3.1% to the voting shares.
For investors bullish on the outlook for
the search giant, the class A voting stock
looks like the better bet. Alphabet’s nonvot-
ing class C shares (ticker: GOOG) closed at
$2,591.49 on Friday, a premium of about $81
a share to the class A voting shares
(GOOGL), which closed at $2,510.37.
At the start of 2021, the voting shares
traded at a small premium and were close to
parity on March 31. The spread widened to
more than $100 a share in June.
Alphabet stock has been on a roll this
year, with the nonvoting shares up 48% and
the voting stock up 43%, the best showing
among the five megacap tech stocks: Apple
(AAPL), Microsoft (MSFT), Amazon.com
(AMZN), and Facebook (FB) are the others.
Evercore ISI analyst Mark Mahaney re-
mains bullish on Alphabet, arguing that the
company is capable of annual revenue
growth of 15% to 20% in the next three years
and yearly gains of 18% to 23% in earnings
per share, driven by stock buybacks. He has
an Outperform rating and a price target of
$2,825 on the stock.
Mahaney says it “makes a lot of sense” for
investors to consider the voting stock. The
class A voting stock has one vote per share
and the class C shares have no votes. There
are about 300 million class A shares out-
standing and 323 million class C shares.
(Co-founders Sergey Brin and Larry Page
control Alphabet through ownership of the
bulk of the nontraded class B supervoting
stock, which has 10 votes per share.)
Alphabet’s valuation has risen this year,
and the stock now trades for nearly 30 times
projected 2021 earnings of $88 a share.
The effective valuation, however, is lower
when stripping out the annual losses in the
company’s Other Bets business of about $5 a
share, as well as losses at Google Cloud,
which competes against Amazon’s and Mi-
crosoft’s cloud-computing juggernauts.
Mahaney says some investors hope Al-
phabet can turn the cloud business from a
“two-horse, one-pony race into a three-horse
race.” He’s not convinced, but says the in-
vestment story doesn’t hinge on that, given a
strong outlook in search and monetization
opportunities in Google Maps and other
businesses. Then there is Alphabet’s Waymo,
the leader in autonomous-driving technol-
ogy, and its valuable YouTube platform.
Many investors are encouraged that Al-
phabet has stepped up its share-repurchase
program, buying back a record $11.4 billion
in the first quarter, Mahaney notes. (One
reason that the class C stock could trade at a
premium is that Alphabet’s stock-buyback
program involves the nonvoting stock.)
Alphabet continues to sit on a large net-
cash balance of $121 billion. Mahaney thinks
the company can increase its repurchases to
$15 billion a quarter, or $60 billion annually.
He notes that Apple’s higher valuation has
reflected in part its aggressive stock-repur-
chase program.— Andrew Bary
Industry Action
Performance of the Dow Jones U.S. Industrials, ranked by weekly percent change.*
Consumer Services 1.46%
Utilities 0.87
Technology 0.64
Industrials 0.63
Health Care 0.31
Financials 0.08
–0.17 Basic Materials
–0.71 Consumer Goods
–1.37 Telecommunications
–3.25 Oil & Gas
- For breakdown see page M36. Source: S&P Dow Jones Indices
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