Alphabet Inc (GOOG, Financial) has recently seen a daily gain of 3.13% and a three-month gain of 8.55%. With an Earnings Per Share (EPS) (EPS) of 4.72, the question arises: is the stock fairly valued? As we delve into the financials and valuation analysis of Alphabet Inc (GOOG), we encourage you to read the comprehensive analysis that follows.
Introducing Alphabet Inc (GOOG, Financial)
Alphabet Inc (GOOG) is a holding company, with internet media giant Google as its wholly-owned subsidiary. Google contributes to 99% of Alphabet's revenue, with over 85% coming from online ads. Other revenue streams include sales of apps, content on Google Play and YouTube, cloud service fees, and other licensing revenue. Alphabet also generates revenue from hardware sales, including Chromebooks, the Pixel smartphone, and smart home products like Nest and Google Home. The company also invests in moonshot projects through its 'other bets' segment, targeting advancements in health (Verily), internet access (Google Fiber), self-driving cars (Waymo), and more.
At its current price of $135.92 per share, Alphabet has a market cap of $1.7 trillion. Comparing the stock price with the GF Value, an estimation of fair value, Alphabet (GOOG, Financial) appears to be fairly valued.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
The GF Value Line is the fair value that the stock should be traded at. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Alphabet (GOOG, Financial) stock shows every sign of being fairly valued based on the GuruFocus Value calculation. Because Alphabet is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
Financial Strength of Alphabet (GOOG, Financial)
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Alphabet has a cash-to-debt ratio of 4.06, which is worse than 55.4% of 565 companies in the Interactive Media industry. GuruFocus ranks the overall financial strength of Alphabet at 9 out of 10, which indicates that the financial strength of Alphabet is strong.
Profitability and Growth of Alphabet (GOOG, Financial)
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Alphabet has been profitable 10 over 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 86.32% of 585 companies in the Interactive Media industry. Overall, the profitability of Alphabet is ranked 10 out of 10, which indicates strong profitability.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Alphabet is 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 62.89% of 388 companies in the Interactive Media industry.
ROIC vs WACC: A Profitability Indicator
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Alphabet's return on invested capital is 27.32, and its cost of capital is 10.92.
Conclusion
Overall, Alphabet (GOOG, Financial) stock shows every sign of being fairly valued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 62.89% of 388 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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