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Alphabet: Tech Behemoth Remains Attractive Option for Investors
Stock Analysis & Ideas

Alphabet: Tech Behemoth Remains Attractive Option for Investors

Alphabet (GOOGL) is a global technology company. It provides products and services including laptops, phones, YouTube, online advertising, online search services, email, and a Cloud business. The company derives revenue through a variety of models, including online advertising through its online search and YouTube businesses.

The main value for Alphabet stems from massive network advantages on its Google search engine, YouTube, and overall online advertising services that make it the go-to choice for consumers, content creators, and most importantly, advertisers. This gives Alphabet significant pricing power and strong customer, content creator, and advertiser loyalty. 

The company also benefits from being able to attract the best and brightest minds in its fields, leading to a highly talented brain trust. This enables Alphabet to create the best technologies to retain dominance in its core businesses while also venturing into adjacent businesses with a generally successful track record. An example of this is the success its cloud business has achieved in recent years. (See Alphabet Class A stock chart)

Valuation Metrics

Despite sporting a very strong business model that consistently generates double digit returns on invested capital, impressive growth numbers, and a massive net cash position that includes nearly $136 billion in cash and short-term investments on hand, Alphabet’s valuation is quite reasonable.

The stock trades at just 27.8x normalized earnings, which is a discount to the broader S&P 500 and is even cheaper on a price to free cash flow basis at 26.5x. Meanwhile, revenue is expected to grow 37.2% in 2021 and 15.6% in 2022, with similarly impressive earnings growth.

Wall Street’s Take

From Wall Street analysts, Alphabet earns a Strong Buy consensus rating based on 28 Buy ratings, one Hold rating, and zero Sell ratings in the past three months. Additionally, the average Alphabet price target of $3,146 puts the upside potential at 16%.

Google stock price prediction

Summary and Conclusions

Alphabet has a lot going for it, thanks to the strong moat around its Google search and YouTube platforms which in turn make its internet advertising business immensely profitable. Furthermore, its cloud business and other ventures provide additional sources of profit and growth.

Most impressively, its balance sheet is extremely strong and the company’s brain trust is second to none in its fields of operation, giving it the ability to continue innovating and creating new sources of revenue. The company also possesses vast amounts of consumer data that it will be able to apply to emerging artificial intelligence technologies, further extending its dominance in its current businesses as well those to come.

Last, but not least, the stock still looks to be priced attractively relative to the broader stock market, and analysts are overwhelmingly bullish on the stock. The biggest risks facing Alphabet right now are the potential for antitrust action from regulators as well as the potential for management to struggle to find new areas to allocate shareholder capital. As a result, investors might be prudent to keep these risks in mind and avoid overexposing themselves to the company despite its many appealing qualities.

Disclosure: On the date of publication, Samuel Smith had no position in any of the companies discussed in this article.

DisclaimerThe information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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