(C) Reuters. Alphabet: Spelling Out an Attractive Stock
Alphabet (NASDAQ:GOOGL), the parent company behind Google and its various other ventures, is currently the third highest-valued company globally. With a market of just under $2 trillion, it ranks only behind Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT).
Alphabet’s shares have doubled over the past year, reaching new highs by the week. Despite the stock’s prolonged rally, I view the valuation as quite reasonable, considering the company’s growth and profitability prospects. Due to the combination of as its wide moat, fantastic financials, and growing capital returns, Alphabet has likely more upside from its current levels. Hence, I am bullish on the stock. (See Alphabet stock charts on TipRanks)
Growth is Accelerating
When it comes to huge companies, it’s quite impressive to see growth in double-digits. In the case of Alphabet, despite its mature operations, the company continues to expand rapidly.
Revenue growth had stagnated in last year’s Q2, as companies remained prudent on their advertising spending due to the uncertainties that rose during the early stages of the pandemic. Since then, Alphabet’s growth has not only resumed, but its most recent Q2 results showed revenue growth of 62%, the highest rate in around 14 years.
Google Services, which accounts for 92% of total sales, benefited massively from surging Google Search and YouTube traffic. Specifically, Google Search revenues grew 68%, and YouTube ad revenue rose 84%. With the pandemic increasing the time we spend online, it makes sense that the internet’s most prominent “landlord” would be set to profit significantly.
Keep in mind that Alphabet’s business model is also incredibly scalable. Apart from the parent company’s “future bets” like Waymo, which are likely to keep eating away cash until they eventually (and hopefully) pay off, relatively few extra expenditures are assumed as the company’s primary services expand. This has a dramatic effect on Alphabet’s net income margins, which are juicy enough to be hovering near 30%. For this reason, the massive revenue bump during Q2 resulted in Alphabet posting a new all-time high bottom line of $18.5 billion.
Considering that the company’s growth acceleration is certain to keep driving the top and bottom line only forward, at least in the short to medium term, it’s fair to use its latest quarter as a run-rate indicator. This translates to $74 billion of net income on an annualized basis, assuming no further intra-year growth.
At Alphabet’s current market cap of $1.84 trillion, this implies a P/E of 24.8. If we were to use analyst estimates instead, which may quite reasonably assume that EPS growth is at least likely to cool off after such a great Q2, the forward P/E comes out at around 28 (assumes EPS for the year of around $100.7).
In both cases, the stock is very reasonably valued, considering its massive moat (arguably a monopoly in its space), its incredible margin of safety in the balance sheet (cash and equivalents of $135.8 billion), and its rock-solid growth and prospects. Management’s continuously growing stock buybacks should also further power shareholder returns, especially when executed at the current valuation multiples.
Wall Street’s Take
Turning to Wall Street, Alphabet has a Strong Buy consensus rating, based on 28 Buys, one Hold, and zero Sells assigned in the past three months. At $3,198.86, the average Alphabet price target implies a 15.98% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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Alphabet: Spelling Out an Attractive Stock