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Alphabet: Compelling Value after FAANG Fumble
Stock Analysis & Ideas

Alphabet: Compelling Value after FAANG Fumble

Shares of Alphabet (GOOGL) failed to hold up the FAANG basket, which is now beginning to slip alongside almost everything else.

After its latest round of underwhelming numbers, though, one of the mightiest members of FAANG has fallen, now down 24% from its all-time high just over of $3,000 per share.

Despite the weak quarter, Alphabet is one of many magnificent companies that will be marching higher again when the time comes. For now, the macro picture is fading, and many are bracing for a recession.

With weakness in YouTube and more deceleration to come, Alphabet seems to have lost its way. However, cloud growth still looks robust, and once the broader social media space begins experiencing more activity, YouTube is likely to lead the upward charge again.

GOOG stock is starting to become way too cheap at 20.6 times trailing earnings. For such a high-quality FAANG with one of the best management teams, I view the modest multiple as one of the better bargains in the large-cap space. I remain bullish on GOOG stock.

A Return to Pre-Pandemic Lows? Not Quite

Did GOOG stock get ahead of itself when it peaked a few quarters ago? Unlike many bubbly growth stocks that shed more than 75% of their value, I’d argue that no, Alphabet didn’t get all that far ahead of itself.

There’s a lot to love about Alphabet’s search, cloud, and YouTube businesses, even with the occasional bumps in the road. If you remember, Alphabet’s last quarter was quite sensational, with the $30.69 per-share earnings that topped the $27.51 analyst consensus. These days, quarterly results are not enough to move the needle higher, even on the highest quality blue-chip stocks.

Many are convinced we’re headed for a recession. Add a quarterly miss into the equation, and you can bet investors will be quick to hit that panic button.

Many are finding it difficult to hang on following Alphabet’s first-quarter flop that saw EPS fall short ($24.62 versus the $25.89 estimate). The weakness in YouTube was a major headline, but you can’t ignore the continued strength in Alphabet’s other flagship businesses.

While it would have been nice to see strength across all fronts, I think 23% in year-over-year sales growth is nothing to fret about in such a choppy environment.

Given the massive misses by other FAANG companies, such a mere miss should have investors breathing a sigh of relief. That’s just not the type of market we’re in.

Was Alphabet’s Big Quarterly Flop Really that Bad?

Though Alphabet’s rare earnings miss was underwhelming, I don’t view the valuation reset as warranted. You’re getting a high-caliber growth company, with many growth wild cards for around 20 times earnings, with a nearly five times sales multiple.

Ad-based search is still one of the most enviable and widest-moat cash cows out there. While soft in Q1, YouTube is not done its growth, as it continues to enjoy the positive effects of its flywheel. More content means more engagement.

Finally, Alphabet has its Google Cloud business, which, I believe, has room to run versus its two larger brothers in the public cloud.

Let’s not forget about Alphabet’s wild card, moonshot bets. At these valuations, they seem to be thrown in for free. It’s hard to factor into a financial model just how influential something like Waymo can be to cash flows in the next decade. It still should be viewed as more than just a roll of the dice though, in my opinion.

Alphabet still has its innovative edge, and arguably, it can innovate far better than some smaller-cap firms out there.

Wall Street’s Take

According to TipRanks, GOOGL stock comes in as a Strong Buy. Out of 32 analyst ratings, there are 32 Buy recommendations.

The average Alphabet price target is $3,323.18, implying 45.6% upside potential. Analyst price targets range from a low of $2,336 per share to a high of $4,118 per share.

Bottom Line on Alphabet Stock

Unlike other high-tech innovators, Alphabet has cash-cow businesses it can fall back on when times get tough. Waymo could flop and GOOGL stock can still be a profitable long-term investment.

For the time being, though, growth stories and innovation are “scary” terms. For longer-term investors, therein lies the opportunity.

Although GOOG stock will be dragged lower if the macro picture continues to get uglier, the stock is getting cheap versus its fundamentals. The first quarter was not stellar, but it wasn’t nearly as bad as it could have been.

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