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Alphabet: Reasonably Valued with More Upside Ahead
Stock Analysis & Ideas

Alphabet: Reasonably Valued with More Upside Ahead

Alphabet (GOOGL), the parent company of Google and its numerous other ventures, is the third highest-valued company globally, boasting a market cap of $1.89 trillion. The company only ranks behind Apple (AAPL) and Microsoft (MSFT).

Alphabet’s shares have nearly tripled since the historic plunge in March of 2020, with the company’s product becoming more essential than ever in the accelerated digital economy. Despite the stock’s extended rally, I believe the stock remains reasonably valued, granting the company’s growth and profitability prospects.

Combining Alphabet’s wide moat, wonderful financials, and increasing capital returns, the stock likely has further upside from its present levels. Hence, I am bullish on the stock. (See Analysts’ Top Stocks on TipRanks)

Growth Remains Solid

It’s quite remarkable to see the mega-caps of these days grow in the double-digits. Tech and e-commerce companies were further boosted by the COVID-19 pandemic, and Alphabet was no different. The tailwinds created from the pandemic over the past couple of years have lasted to this day, with Alphabet’s most recent Q3 results posting record financials.

Revenue growth had flattened in last year’s Q3, as businesses turned frugal on their advertising expenditures due to the challenges that arose during the initial stages of COVID-19. Alphabet’s growth rates have not only returned but even accelerated in the most recent quarters. In Q3, revenues grew 39%, boosting the top line to a new all-time high of $65.12 billion.

Google Services, which accounts for 91.8% of total sales, availed considerably from sky-rocketing Google Search and YouTube traffic. Particularly, Google Search revenues increased 44.1%, and YouTube ad revenues advanced 44%. With COVID-19 and its variants continuing to persist globally, the time we spend online continues to hit new record levels, resulting in the Internet’s biggest “landlord” benefiting substantially.

Also, it’s worth contemplating that any startup popping up these days is basically guaranteed to spend X% of its raised capital on digital advertising. Essentially, Alphabet is a toll both to a significant percentage of all venture capital raised globally, which is staggering.

To praise the company a little more, Alphabet’s business model is also highly scalable. Excluding the parent company’s “future bets” like Waymo, which should keep burning cash until (and if) they pay off, the company takes on relatively few additional costs to support the growing top line.

This has consistently had a major impact on Alphabet’s net income margins, which landed at a massive 29% in Q3. With revenue hitting a new all-time high during the quarter, combined with the company’s juicy margins, Alphabet recorded a new all-time high bottom line of $18.93 billion.

Valuation

Alphabet has shown no signs of slowing down, at least in the short to medium term. Analysts expect the company to deliver EPS of $113.5 in FY2022, which at Alphabet’s current market cap of $1.89 trillion, implies a P/E of around 25 on next year’s profitability.

The company has repurchased nearly $45 billion worth of stock during the past four quarters, while buybacks should continue to expand according to Alphabet’s profitability.

The stock appears quite reasonably valued, given its deep moat (arguably a monopoly in its space), its fantastic margin of safety in the balance sheet (cash and equivalents of $142 billion), and its robust growth and prospects.

Wall Street’s Take

Turning to Wall Street, Alphabet has a Strong Buy consensus rating, based on 25 Buys, two Holds, and zero Sells assigned in the past three months. At $3,328.08, the average Alphabet price target implies 16.7% upside potential.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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