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Spelling Out an Attractive Stock By TipRanks


© Reuters. Alphabet: Spelling Out an Attractive Stock

Alphabet (NASDAQ:), the parent company behind Google and its various other ventures, is currently the third highest-valued company globally. It ranks just behind Microsoft (NASDAQ) and Apple (NASDAQ), with a market value of less than $2 trillion.

Alphabet’s stock has doubled in value over the past year. They have reached new highs each week. The stock has rallied for a while, but I consider the price to be reasonable considering its growth prospects and future profitability. Alphabet’s combination of its large moat, great financials and growing capital returns means that it has more upside than its current level. The stock has my support. (See Alphabet stock charts on TipRanks)

Growth is Accelerating

When it comes to huge companies, it’s quite impressive to see growth in double-digits. Alphabet’s mature operation has not stopped the company from growing rapidly.

In the Q2 of last year, revenue growth stagnated due to companies being cautious about advertising spending in the face of uncertainties. Alphabet’s growth is now back on track. It recently reported revenue growth at 62% in Q2, the highest level of growth for nearly 14 years.

Google Services (which accounts for 92%) has greatly benefited from the surge in YouTube and Google Search traffic. Google Search revenue grew by 68% and YouTube advertising revenues rose by 84%. The internet’s top “landlord”, Alphabet, is expected to make significant profits due to the increasing time spent online by the pandemic.

Alphabet is also extremely scalable in its business model. Except for Waymo’s future bets, which may continue eating away money until they finally (and hopefully pay off), the parent company assumes relatively little additional spending as its primary services grow. Alphabet’s margins of net income have been impacted by this, and they are now hovering around 30%. Alphabet posted a new record-breaking $18.5 million bottom line due to its massive revenue growth during Q2.

The Valuation

Considering that the company’s growth acceleration is certain to keep driving the top and bottom line only forward, at least in the short to medium term, it’s fair to use its latest quarter as a run-rate indicator. On an annualized basis this is $74 billion net income, with no additional intra-year growth.

This implies that Alphabet has a current market cap $1.84 billion, which means that the P/E is 24.8 Instead, we could use analyst estimates which would suggest that EPS growth will slow down after such an impressive Q2. The forward P/E is around 28. This assumes EPS for 2017 of approximately $100.7.

Both cases show that the stock has a reasonable value considering the size of its moat, which is arguably an exclusive space, its extraordinary margin of safety (cash equivalents of $135.8billion), as well its solid growth and future prospects. Management’s stock buybacks, which are growing in number and value at present multiples, should further boost shareholder returns.

Wall Street’s Take

Turning to Wall Street, Alphabet has a Strong Buy consensus rating, based on 28 Buys, one Hold, and zero Sells assigned in the past three months. At $3,198.86, the average Alphabet price target implies a 15.98% upside potential.

Disclosure: Nikolaos Sismanis didn’t hold any positions in the securities discussed in this article at the time it was published.

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