Alphabet Inc (GOOG, Financial) experienced a daily gain of 5.59% and reported an Earnings Per Share (EPS) (EPS) of $4.49. The question that arises for investors is whether the stock is modestly undervalued. This article aims to provide an in-depth analysis of Alphabet's valuation, and we invite you to read further for a comprehensive understanding.
Company Overview
Alphabet Inc (GOOG, Financial) is a holding company, with its wholly-owned subsidiary Google generating 99% of its revenue. Google's revenue stems primarily from online ads, accounting for over 85% of its total income. The rest is derived from sales of apps and content on Google Play and YouTube, cloud service fees, and other licensing revenue. Hardware sales from Chromebooks, the Pixel smartphone, and smart home products like Nest and Google Home also contribute to its revenue. Additionally, Alphabet invests in moonshot projects through its 'other bets' segment, focusing on health enhancement (Verily), faster internet access (Google Fiber), self-driving cars (Waymo), and more.
Understanding the GF Value
The GF Value is a proprietary measure that estimates a stock's intrinsic value. This valuation is based on three key factors: historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line represents the stock's ideal fair trading value.
Alphabet's stock shows signs of being modestly undervalued according to the GF Value. This valuation suggests that Alphabet's long-term stock return is likely to be higher than its business growth. The GF Value chart of Alphabet provides a visual representation of this assessment.
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Financial Strength
Investing in companies with low financial strength could lead to permanent capital loss. Therefore, it's crucial to review a company's financial strength before deciding to buy shares. Alphabet has a cash-to-debt ratio of 3.95, ranking worse than 56.54% of companies in the Interactive Media industry. However, GuruFocus ranks Alphabet's financial strength as 9 out of 10, indicating a strong balance sheet.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is generally less risky. Alphabet has been profitable 10 over the past 10 years. In the past twelve months, the company had a revenue of $284.6 billion and an EPS of $4.49. Its operating margin is 25.35%, ranking better than 86.8% of companies in the Interactive Media industry. Alphabet's 3-year average revenue growth rate is better than 73.99% of companies in the Interactive Media industry. Alphabet's 3-year average EBITDA growth rate is 21.8%, ranking better than 63.08% of companies in the Interactive Media industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted cost of capital (WACC) is another way to evaluate its profitability. Alphabet's ROIC was 27.36, while its WACC came in at 10.61 over the past 12 months. A higher ROIC than WACC indicates that the company creates value for shareholders.
Conclusion
In summary, Alphabet (GOOG, Financial) shows signs of being modestly undervalued. The company's financial condition is strong, and its profitability is robust. Its growth ranks better than 63.08% of companies in the Interactive Media industry. To learn more about Alphabet stock, you can check out its 30-Year Financials here.
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