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Alphabet Stock Is a Buy as Big Tech Bounces Back

Published 03/23/2023, 08:00 AM
Updated 07/09/2023, 06:31 AM
  • Big tech took a beating as the Fed began raising interest rates.
  • But, as traditional sectors like financials are under stress, interest in big tech seems to be returning.
  • Trading with an upside potential of 22.8%, Alphabet stock presents a great opportunity to buy at current levels.

A softer Fed in the wake of the banking crisis and declining inflation, a general distrust of traditional sectors (especially financials), return of assets classes such as Bitcoin, gold, and the tech sector have rekindled investor interest in some stocks that have been beaten down by the market for some time.

Now that Meta Platforms (NASDAQ:META) has rallied, another tech giant has seen rising buying interest while its stock was heading lower: Alphabet Class C (NASDAQ:GOOG).

So what does the company actually do?

Alphabet is a holding company with investments in Google and other ventures.

The Google segment includes internet products such as search, ads, commercials, maps, YouTube, apps, cloud, Android, Chrome, Google Play, and hardware products, including Chromecast, Chromebook, and Nexus.

It also includes technical infrastructure and virtual reality alongside advertising, digital content sales, applications, cloud services, and the sale of Google-branded hardware.

Others comprise various operating segments, including companies such as Access/Google Fiber, Calico, Nest, Verily, GV, Google Capital, X, and other ventures.

The Other Ventures segment sells Nest hardware products, provides Internet and television services through Google Fiber, and does licensing, research, and development through Verily.

The Data at a Glance

Let's start with the financial history, which provides several useful insights, including:

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Rising revenue and profit trends over time, as well as consistent margins (last year, all the big companies in both tech and advertising took a hit, but Alphabet has the positioning and competitive advantage to bounce back quickly, thanks to Youtube and AI).

Alphabet Revenue Trend

Source: InvestingPro

Alphabet Net Income Trend

Source: InvestingPro

Alphabet Gross Profit Margins

Source: InvestingPro

The growth rate of EPSd (diluted earnings per share) has been 18.8% over the last 10 years.

Alphabet Diluted Earnings Per Share

Source: InvestingPro

Balance Sheet and Cash Flows

In the form of cash and short-term investments, Alphabet has more than $114 billion, with total current assets of about $165 billion. This, when compared to its current liabilities ($69 billion), provides an excellent short-term balance sheet.

The debt/equity ratio is really good (currently 0.42, I consider ratios of 0.5/0.6 less optimal).

On the cash flow side, the operating cash flow trend has ebbed and flowed but remains positive overall.

Alphabet Cash Flow Trend

Source: InvestingPro

With an FCF of $60 billion (the latest available), the FCF yield is about 4.5%. Good, but not outstanding (optimal yield for me is about 8-10%).

Valuation

Turning to valuations, the stock is currently trading at a discount of just under 23% to its fair value of around $128 per share (based on the average of 13 different models).

The analysts' target price is $125, and the upside is about 19.9%.

Alphabet Fair Value

Source: InvestingPro

All in all, the prospects for further growth are good, especially if the buying interest in the tech sector continues to grow.

The analysis was done using InvestingPro. To access the tool, click HERE.

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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, consultation, or recommendation to invest and, as such, is not intended to induce the purchase of any assets. I would like to remind you that any type of investment is evaluated from multiple perspectives and is highly risky and, therefore, any investment decision and the associated risk remain with the investor.

Latest comments

I need this
i never understood analysts, if they are good at what they do they would not be wasting time writing articles.It is like selling scrtach cards if they were any good the seller would be scratching them.
Europe is about 3 months ahead of the USA in the fight with inflation. Similarly, it saw inflation fall and now has started to get sticky again and rise. I do not believe inflation was ever going to be a straight decline as the market is pricing in. Can see it get stuck at over 4%+ with wage inflation getting entrenched and there will be no way will it fall unless something breaks (not with unemployment at 3.6% and 10+ million open jobs). Already starting to see cracks with banks and Fed Balance sheet rising again which will impact inflation come the summer....
Stock is overbought now and clearly bear flagging. Wait until it reaches 75$.
Didn't you say 2022 won't be like 2008 just mere days ago? Don't delete that article now, we're getting there
Big tech are bouncing back‼️......just continue 'plan' laying off employees, 'forecast' better revenue and 'expected' higher EPS.......nobody bother about the inflationary datas ......
Inflation pushes stocks higher. It's the rising interest rates that pressures equities
 Really???????? Inflation eats into margins / consumer spending / confidence and buying patterns. Inflation may see certain defence / staple stocks rise as they can increase prices - but will get to the stage where the option is to buy food or a newest iPhone...esp once unemployment starts rising like it must to get inflation back under control.
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