Alphabet Inc (GOOG, Financial) witnessed a daily gain of 1.76%, and a 3-month gain of 10.52%. With an Earnings Per Share (EPS) of 4.72, the question arises: is the stock fairly valued? This article provides a comprehensive analysis of Alphabet's valuation, encouraging readers to delve into the following analysis for a clearer understanding of the company's true worth.
Company Overview
Alphabet Inc, an internet media titan, operates as a holding company with Google as its wholly-owned subsidiary. Google generates 99% of Alphabet's revenue, primarily from online ads. Other revenue sources include sales of apps and content on Google Play and YouTube, cloud service fees, hardware sales, and other licensing revenue. Alphabet also invests in moonshot projects in its 'other bets' segment, focusing on technology to enhance health (Verily), provide faster internet access (Google Fiber), enable self-driving cars (Waymo), and more.
Decoding the GF Value
The GF Value is an exclusive measure of a stock's intrinsic value, computed based on historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line represents the ideal fair trading value of the stock. If the stock price significantly deviates from the GF Value Line, it indicates whether the stock is overvalued or undervalued, thus influencing its future return.
Currently, Alphabet (GOOG, Financial) appears to be fairly valued based on the GF Value. Priced at $134.17 per share, Alphabet has a market cap of $1.70 trillion. As 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
Investing in companies with poor financial strength can pose a high risk of permanent capital loss. Therefore, it's crucial to assess a company's financial strength before purchasing shares. Alphabet's cash-to-debt ratio of 4.06 ranks worse than 56.59% of 569 companies in the Interactive Media industry. However, Alphabet's overall financial strength is 9 out of 10, indicating strong financial stability.
Profitability and Growth
Investing in profitable companies, especially those demonstrating consistent profitability over the long term, poses less risk. Alphabet has been profitable 10 over the past 10 years, with an operating margin of 25.75%, ranking better than 87.18% of 585 companies in the Interactive Media industry. Alphabet's growth is also impressive, with a 3-year average annual revenue growth rate of 22.9%, ranking better than 73.06% of 516 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. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Alphabet's ROIC was 27.32, while its WACC came in at 11.24.
Conclusion
In summary, Alphabet (GOOG, Financial) appears to be fairly valued. The company's financial condition is strong, and its profitability is robust. Its growth ranks better than 64.84% of 384 companies in the Interactive Media industry. To learn more about Alphabet stock, you can check out its 30-Year Financials here.
To find out the high-quality companies that may deliver above-average returns, please check out GuruFocus High Quality Low Capex Screener.
