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Google's Reorg a Good Thing for Investors

Transparency overhang should abate, but we're unlikely to materially change our fair value estimate, says Morningstar analyst Rick Summer.

We believe the reorganization is generally positive for investors, as we believe the company's lack of transparency has created an overhang on the stock during the past year. Still, investors will own exactly the same assets after the reorganization, and we aren't likely to materially increase our $715 fair value estimate, though we reiterate our wide moat rating for the firm. The reorganization is planned for later this year.

Alphabet will disclose the financial results for its Google subsidiary separately from itself, in what we believe is the most positive outcome of the reorganization. Core to our thesis is our belief that operating leverage in the entire entity is likely to improve, as investments in the more nascent opportunities (including Nest, Fiber, and Google X), which are depressing operating margins, begin to bear fruit or wither. With discrete results reported for the Google business, investors will be able to understand the strength of the core while holding the company accountable for capital allocation in the remaining lines of business.

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About the Author

Rick Summer

Strategist

Rick Summer, CFA, CPA, is a technology strategist for Morningstar, responsible for Internet and technology research. Before assuming his current position in 2014, he was a senior equity analyst. He joined Morningstar in 2005 as an equity analyst, covering software and Internet companies. He has operating experience in the wireless and software infrastructure industries and has worked as a private equity investor for UBS Global Asset Management.

Summer holds a bachelor’s degree in business administration from Emory University and a master’s degree in business administration from the University of Chicago Booth School of Business. He also holds the Chartered Financial Analyst® designation and is a Certified Public Accountant (CPA).

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