Alphabet Stock Is a Buy as Big Tech Bounces Back
Francesco Casarella | Mar 23, 2023 23:00
- Big tech took a beating as the Fed began raising interest rates.
- But, as traditional sectors like financials are under stress, interest in big tech seems to be returning.
- Trading with an upside potential of 22.8%, Alphabet stock presents a great opportunity to buy at current levels.
A softer Fed in the wake of the banking crisis and declining inflation, a general distrust of traditional sectors (especially financials), return of assets classes such as Bitcoin, gold, and the tech sector have rekindled investor interest in some stocks that have been beaten down by the market for some time.
Now that Meta Platforms (NASDAQ:META) has rallied, another tech giant has seen rising buying interest while its stock was heading lower: Alphabet Class C (NASDAQ:GOOG).
So what does the company actually do?
Alphabet is a holding company with investments in Google and other ventures.
The Google segment includes internet products such as search, ads, commercials, maps, YouTube, apps, cloud, Android, Chrome, Google Play, and hardware products, including Chromecast, Chromebook, and Nexus.
It also includes technical infrastructure and virtual reality alongside advertising, digital content sales, applications, cloud services, and the sale of Google-branded hardware.
Others comprise various operating segments, including companies such as Access/Google Fiber, Calico, Nest, Verily, GV, Google Capital, X, and other ventures.
The Other Ventures segment sells Nest hardware products, provides Internet and television services through Google Fiber, and does licensing, research, and development through Verily.
h2 The Data at a Glance/h2Let's start with the financial history, which provides several useful insights, including:
Rising revenue and profit trends over time, as well as consistent margins (last year, all the big companies in both tech and advertising took a hit, but Alphabet has the positioning and competitive advantage to bounce back quickly, thanks to Youtube and AI).
Source: InvestingPro
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Source: InvestingPro
Source: InvestingPro
The growth rate of EPSd (diluted earnings per share) has been 18.8% over the last 10 years.
Source: InvestingPro
h2 Balance Sheet and Cash Flows/h2In the form of cash and short-term investments, Alphabet has more than $114 billion, with total current assets of about $165 billion. This, when compared to its current liabilities ($69 billion), provides an excellent short-term balance sheet.
The debt/equity ratio is really good (currently 0.42, I consider ratios of 0.5/0.6 less optimal).
On the cash flow side, the operating cash flow trend has ebbed and flowed but remains positive overall.
Source:
With an FCF of $60 billion (the latest available), the FCF yield is about 4.5%. Good, but not outstanding (optimal yield for me is about 8-10%).
h2 Valuation/h2Turning to valuations, the stock is currently trading at a discount of just under 23% to its fair value of around $128 per share (based on the average of 13 different models).
The analysts' target price is $125, and the upside is about 19.9%.
Source: InvestingPro
All in all, the prospects for further growth are good, especially if the buying interest in the tech sector continues to grow.
The analysis was done using InvestingPro. To access the tool, click HERE .
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