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Here's why Alphabet could outperform its FANG rivals

Saheli Roy Choudhury

Alphabet 's reasonable valuation and growing market share across segments could see the tech giant outperform rivals this year, according to Monness, Crespi, Hardt & Co. analyst James Cakmak.

Cakmak told CNBC's " The Rundown " on Tuesday investor expectations for Alphabet were still relatively modest, potentially setting the stage for the company's shares to outperform.


The parent company of Google has a "pretty reasonable valuation at 10 times EBITDA," said Cakmak. "I can't say the same about Facebook and Amazon."

In a separate Jan. 3 note, he estimated Alphabet's 2017 EV / EBITDA at 10.9 times, versus 19.2 times for Amazon and 13.5 times for Facebook . EV / EBITDA is the ratio of a company's enterprise value over earnings before interest, tax, depreciation and amortization. The higher the EV/EBITDA number, the more overvalued a company is.

Alphabet's market capitalization as of Tuesday stood at $563.04 billion, according to Thomson Reuters data. For 2017, Cakmak expects the company's earnings per share to come in at $32.63, up from 2016's estimate of $27.78.

From an operational standpoint, significant progress in optimizing search experiences and ads, capturing brand ad dollars through YouTube and Google's prowess in natural language processing underpinned the favorable outlook for Alphabet, Cakmak noted. Alphabet has also made "genuine efforts" in healthcare and education, Cakmak added in his note.

Meanwhile, Cakmak said in his note Amazon was a crowded trade, where the costs associated with content, logistics and competitive pricing pressure to Amazon Web Services were unlikely to have been fully incorporated into expectations. Facebook, on the other hand, was battling increasingly challenging competitors and threats to engagement. It could also potentially invest in photo messaging service Snap.

He concluded the expectations for both Amazon and Facebook were "extremely high" and suggested their performances may not live up to investors' expectations; he maintained a neutral rating for both companies.

Meanwhile, on the political front Alphabet was one of the better-positioned tech companies in Silicon Valley that was in tune with the incoming administration of President-elect Donald Trump , Cakmak said Tuesday.

In December, Alphabet's executive chairman Eric Schmidt and CEO Larry Page were part of the group of top executives from the world's biggest tech companies that gathered at Trump Tower to meet the President-elect. Jobs, skilled immigration and China were the main topics on the table at the meeting. Facebook's chief operating officer Sheryl Sandberg and Amazon founder Jeff Bezos were also in attendance.

Domestic jobs growth, particularly in the manufacturing sector, is a key agenda for Trump. By contrast, Silicon Valley is known for hiring foreigners under the H-1B visa scheme and outsourcing low-skilled, labor intensive jobs to the developing world.

"You look at the H-1B issue, I think that's something that the administration and Silicon Valley can work together around," said Cakmak.

To offset the rising cost of shifting manufacturing back to the U.S., Trump and his team have talked about providing both tax and regulatory relief to companies. Additional tax relief on cash repatriation from overseas has also been on the agenda which, Cakmak believes, many Silicon Valley companies are in favor of.

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