Alphabet (formerly known as Google and still trading as GOOG/GOOGL) reported good results in 3Q15.  This marks the second consecutive quarter that the company has beaten Wall Street expectations after a string of slightly disappointing results.  The shares responded, rising from $500-550 for much of the first half of the year to over $700 today.

Results the last two quarters have dented the bear case that Google is facing rapidly decelerating growth in revenues and profits as the world shifts to using apps within mobile internet.  This reduces the value of search and should hurt the volume of searches and pricing for searches.  The last six months have instead seen acceleration in the number of searches with pricing per search falling but not at an accelerating rate.

Stabilizing or improving fundamentals are not the sole reason for the surge in GOOG shares.   The company has brought in in a new CFO and promoted a new CEO.  The founders of the company have taken a step back and restructured the corporation.  Alphabet is the holding company with basically two divisions:  Google as we know it for search and YouTube and all the other things Google invests in outside the core such Google Glass, self-driving cars, weather balloon delivered internet, etc.  The management and operational restructuring has dramatically improved the corporate culture from an investor perspective.  Disclosure and transparency has improved, capital and operational expenses are more tightly managed, and the company initiated a share buyback.

Put all this together, and Google investors are enjoying the favorable combination of rising earnings estimates and higher valuation of those earnings.  Northlake thinks more is yet to come with upcoming catalysts including the seasonally strong holiday season, greater detail on the “other bets” outside core Google, and possibly some improvement in mobile search pricing.    Core Google can probably earn close to $40 in 2016.  Even if you ascribe zero or negative value to the other bets, conservative in Northlake’s view especially if you also consider the company holds over $100 per share in cash, a target of $800+ seems plausible, or 20x core earnings.  There are very few really large companies in the world with organic growth in the range of 20%.  Google is one of them and deserving of a premium valuation.

GOOG/GOOGL is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  GOOG/GOOGL is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.