Alphabet Inc (GOOG, Financial) experienced a daily gain of 2.37% and a 3-month gain of 3.03%, with Earnings Per Share (EPS) (EPS) standing at 4.72. The question on many investors' minds is whether Alphabet's stock is modestly undervalued. This article aims to answer that question by providing an in-depth valuation analysis. Let's dive in.
A Snapshot of Alphabet Inc (GOOG, Financial)
Alphabet Inc (GOOG) is a holding company, with internet media giant Google as a wholly owned subsidiary. Google generates 99% of Alphabet's revenue, predominantly from online ads. Other revenue sources include sales of apps and content on Google Play and YouTube, cloud service fees, and other licensing revenue. Alphabet also earns from hardware sales such as Chromebooks, the Pixel smartphone, and smart home products including Nest and Google Home. The company's moonshot investments are in its other bets segment, where it invests in technology to enhance health (Verily), provide faster internet access (Google Fiber), enable self-driving cars (Waymo), and more.
As of August 23, 2023, Alphabet (GOOG, Financial) is trading at $132.77 per share, with a market cap of $1.70 trillion. Its estimated fair value (GF Value) stands at $148.24, suggesting that the stock may be modestly undervalued.
Understanding the GF Value
The GF Value is a proprietary measure that estimates the current intrinsic value of a stock. This value is derived from historical trading multiples, a GuruFocus adjustment factor based on past returns and growth, and future business performance estimates. The GF Value Line provides an overview of the fair value at which the stock should ideally be traded.
If the stock's price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if the price is significantly below the GF Value Line, the stock is undervalued, and its future return will likely be higher. For Alphabet (GOOG, Financial), the stock is estimated to be modestly undervalued, suggesting that the long-term return of its stock is likely to be higher than its business growth.
Financial Strength of Alphabet (GOOG, Financial)
Before investing in a company's stock, it's crucial to assess its financial strength. Companies with poor financial strength pose a higher risk of permanent loss to investors. A great way to understand a company's financial strength is by looking at its cash-to-debt ratio and interest coverage. Alphabet has a cash-to-debt ratio of 4.06, which is worse than 55.11% of 548 companies in the Interactive Media industry. However, its overall financial strength is rated 9 out of 10, indicating strong financial health.
Profitability and Growth
Companies that have consistently been profitable over the long term offer less risk to investors. Alphabet's profitability has been strong, with the company having been profitable 10 out of the past 10 years. Over the past twelve months, the company had a revenue of $289.50 billion and Earnings Per Share (EPS) of $4.72. Its operating margin is 25.75%, which ranks better than 85.15% of 586 companies in the Interactive Media industry.
Growth is a crucial factor in a company's valuation. Alphabet's growth has been impressive, with a 3-year average annual revenue growth of 22.9%, which ranks better than 73.74% of 514 companies in the Interactive Media industry. The 3-year average EBITDA growth rate is 21.8%, which ranks better than 63.08% of 390 companies in the Interactive Media industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) is another way to evaluate its profitability. Alphabet's ROIC was 27.32 over the past 12 months, while its WACC came in at 11.03. A higher ROIC than WACC indicates that the company is creating value for shareholders.
Conclusion
In summary, Alphabet's stock is estimated to be modestly undervalued. The company's financial condition is strong, and its profitability is robust. Its growth ranks better than 63.08% of 390 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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