Alphabet Inc (GOOGL, Financial) saw a daily gain of 1.44%, a 3-month gain of 9.83%, and has an Earnings Per Share (EPS) of 4.72. But the question remains: Is the stock fairly valued? This article aims to answer that question through a detailed valuation analysis of Alphabet. We encourage you to read on to gain a deeper understanding of Alphabet's intrinsic value.
Company Introduction
Alphabet Inc (GOOGL, Financial) is a holding company, with internet media giant Google as a wholly-owned subsidiary. Google generates 99% of Alphabet's revenue, primarily from online ads. Other revenue streams include sales of apps and content on Google Play and YouTube, cloud service fees, and other licensing revenue. Alphabet's moonshot investments are in its other bets segment, where it bets on technology to enhance health (Verily), provide faster internet access (Google Fiber), enable self-driving cars (Waymo), and more.
As of October 2, 2023, Alphabet's stock price stands at $132.74, with a market cap of $1.70 trillion. The company's fair value, also known as the GF Value, is estimated at $145.77, suggesting that the stock is fairly valued. The following sections will delve deeper into Alphabet's value, financial strength, profitability, and growth.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. It's calculated based on historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance. We believe the GF Value Line is the fair value that the stock should be traded at.
For Alphabet (GOOGL, Financial), the GF Value Line suggests that the stock is fairly valued. This means that 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 lead to a higher risk of permanent loss of capital. Therefore, it is crucial to carefully review the financial strength of a company before deciding whether to buy its stock. Alphabet's cash-to-debt ratio stands at 4.06, which is worse than 56.59% of 569 companies in the Interactive Media industry. However, GuruFocus ranks Alphabet's overall financial strength at 9 out of 10, indicating that Alphabet's financial strength is robust.
Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors. Alphabet has been profitable 10 out of the past 10 years. Over the past twelve months, the company had a revenue of $289.50 billion and an Earnings Per Share (EPS) of $4.72. Alphabet's operating margin is 25.75%, which ranks better than 87.18% of 585 companies in the Interactive Media industry. Overall, Alphabet's profitability is ranked 10 out of 10, indicating strong profitability.
Another important factor in the valuation of a company is growth. Alphabet's average annual revenue growth is 22.9%, ranking better than 73.06% of 516 companies in the Interactive Media industry. The company's 3-year average EBITDA growth is 21.8%, which ranks better than 64.84% of 384 companies in the Interactive Media industry.
Evaluating Profitability: 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 11.24, indicating that the company is creating value for shareholders.
Conclusion
In summary, Alphabet's stock is estimated to be fairly valued. The company's financial condition is strong, and its profitability is robust. Its growth ranks better than 64.84% of companies in the Interactive Media industry. To learn more about Alphabet's stock, you can check out its 30-Year Financials here.
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