Should you buy Alphabet stock? (Feb 2023)
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Alphabet or Google stock is down almost 13% since reporting earnings on the second February.
That earnings report revealed a 4% decrease in advertising revenue in the fourth quarter. More importantly, a sharp increase in operating expenses meant that earnings shrunk by 17% year over year.
With a share price just below 95 dollars that means the company has a market cap of 1.2 trillion and a cash-rich balance sheet means the enterprise value is around 1.1 trillion.
Although Alphabet earnings were disappointing, they’re not the only reason the share price has fallen.
Last week, Microsoft announced the integration of ChatGPT into it’s Bing search engine. This prompted Google to announce its own AI offering known as Bard.
These announcements led to speculation that Bing could eat into Google’s lead as the world’s most popular search engine. There’s also a question whether search engines are even necessary in a world of conversational AI.
The irony behind these developments is that Alphabet has long been one of the pioneers in artificial intelligence. It’s AlphaGo program was victorious back in 2017,
In fact, artificial intelligence and deep learning are fundamental to all of Alphabets business segments.
Taking a look at the numbers you can see the company looks reasonably valued after the selloff. Enterprise value to EBITDA is under 13 times and enterprise value to free cash flow is under 19 times.
In other words, if you bought Alphabet today, for 1.1 trillion dollars, you’d be paid back in cash in less than 20 years, that’s assuming earnings remains flat.
But Alphabet has a long and consistent history of growth. Revenue has compounded 20% over the last 10 years and earnings have compounded 19%.
Microsoft may be able to gain some market share and regulators pose a risk. But yhe fact is that online advertising continues to be dominated by Google and Meta.
Furthermore, Alphabet has a huge cash pile which it can put to work in various ways.
Assume that Alphabet can grow earnings 10% a year for the next 10 years (half the historical average) and then it trades at 20 times those earnings in 10 years time. That would give the company a market cap of 3.1 trillion and works out to an investment return of 9.9% a year.
Alphabet or Google stock is down almost 13% since reporting earnings on the second February.
That earnings report revealed a 4% decrease in advertising revenue in the fourth quarter. More importantly, a sharp increase in operating expenses meant that earnings shrunk by 17% year over year.
With a share price just below 95 dollars that means the company has a market cap of 1.2 trillion and a cash-rich balance sheet means the enterprise value is around 1.1 trillion.
Although Alphabet earnings were disappointing, they’re not the only reason the share price has fallen.
Last week, Microsoft announced the integration of ChatGPT into it’s Bing search engine. This prompted Google to announce its own AI offering known as Bard.
These announcements led to speculation that Bing could eat into Google’s lead as the world’s most popular search engine. There’s also a question whether search engines are even necessary in a world of conversational AI.
The irony behind these developments is that Alphabet has long been one of the pioneers in artificial intelligence. It’s AlphaGo program was victorious back in 2017,
In fact, artificial intelligence and deep learning are fundamental to all of Alphabets business segments.
Taking a look at the numbers you can see the company looks reasonably valued after the selloff. Enterprise value to EBITDA is under 13 times and enterprise value to free cash flow is under 19 times.
In other words, if you bought Alphabet today, for 1.1 trillion dollars, you’d be paid back in cash in less than 20 years, that’s assuming earnings remains flat.
But Alphabet has a long and consistent history of growth. Revenue has compounded 20% over the last 10 years and earnings have compounded 19%.
Microsoft may be able to gain some market share and regulators pose a risk. But yhe fact is that online advertising continues to be dominated by Google and Meta.
Furthermore, Alphabet has a huge cash pile which it can put to work in various ways.
Assume that Alphabet can grow earnings 10% a year for the next 10 years (half the historical average) and then it trades at 20 times those earnings in 10 years time. That would give the company a market cap of 3.1 trillion and works out to an investment return of 9.9% a year.
Transcript
00:00 Should you buy Alphabet stock? Alphabet or Google is down almost 13% since reporting
00:05 earnings on the 2nd of February. That earnings report revealed a 4% decrease in advertising
00:11 revenue in the 4th quarter. More importantly a sharp increase in operating expenses meant
00:15 that earnings shrunk by 17% year over year. With a share price just below $95 that means
00:21 the company has a market cap now of $1.2 trillion and a cash rich balance sheet means the enterprise
00:27 value is around $1.1 trillion. Although Alphabet earnings were disappointing, they're not the only
00:33 reason the share price has fallen. Last week Microsoft announced the integration of ChatGPT
00:40 into its Bing search engine. This prompted Google to announce its own AI offering known as BARD.
00:45 But this backfired when BARD got a question wrong in its first demonstration of the program. These
00:51 announcements led to speculation that Bing could eat into Google's lead as the world's most popular
00:55 search engine. There's also a question as to whether search engines are even necessary in a
01:01 world of conversational AI. The irony behind these developments is that Alphabet has long been one
01:06 of the pioneers in artificial intelligence. It owns DeepMind and its AlphaGo program was
01:11 victorious back in 2017. In fact artificial intelligence and deep learning are fundamental
01:17 to all of Alphabet's business segments and Bing's own AI demo also contains several mistakes.
01:23 Taking a look at the numbers you can see the company looks reasonably valued after the sell
01:27 off. Enterprise value to EBITDA is under $13 and enterprise value to free cash flow is under $19.
01:34 In other words if you bought Alphabet today for $1.1 trillion you'd be paid back in cash in less
01:40 than 20 years that's assuming earnings remain flat. But Alphabet has a long and consistent history of
01:46 growth. Revenue has compounded 20% over the last 10 years and earnings have compounded 19%.
01:53 Microsoft may be able to gain some market share and regulators also pose a risk but the fact is
01:59 that online advertising continues to be dominated by Google and Meta. There aren't many other
02:04 options out there. Furthermore Alphabet has a huge cash pile which it can put to work in various ways.
02:09 Assume that Alphabet can grow earnings 10% a year for the next 10 years,
02:14 that's half the historical average and then it trades at 20 times those earnings in 10 years
02:19 time that would give the company a market cap of $3.1 trillion and that works out to an investment
02:24 return of 9.9% a year. That seems a relatively safe bet which is why I give the stock a bullish
02:31 rating. But these are my personal opinions not financial advice and I do own a small amount of
02:36 Alphabet stock. For more detailed investing ideas visit our website overlookedalpha.com