GOOGL with Nobias Technology: Case Study on Google
Since its IPO back in 2004, Alphabet (GOOGL), which was then known as Google, has been synonymous with the high growth rates and strong alpha that has been generated by the big winners hailing from Silicon Valley. This stock has one of the world’s largest market capitalizations, at $1.48 trillion. The company has one of the world’s strongest balance sheets, with a AA+ Standard and Poor’s credit rating and nearly $134 billion of cash, cash equivalents, and marketable securities on the books as of the end of its most recent quarter. Alphabet shares have posted total returns of 128.67% and 684.08% during the last 5 and 10-year periods, respectively. Both of these figures are well above the total return results posted by the S&P 500 during the same period (during the last 5 years, the S&P 500 is up approximately 68.4% and during the last 10 years, the major index is up approximately 221%).
What’s potentially most impressive about this relative alpha is that GOOGL shares are currently well off of their recent all-time highs. In late 2021, GOOGL shares were trading north of $3,000/share. Today, GOOGL shares trade for just $2,277.84 (representing a discount of 24.8% from its 52-week, and all-time highs, of $3030.93). Looking back at Alphabet’s history, such significant sell-offs like this have been rare. And, looking at the recent analysis performed by the credible authors and Wall Street analysts tracked by the Nobias algorithm, it appears that that the vast majority of credible individuals that we follow are “Bullish” and looking to take advantage of this dip.
Regarding the company’s recent dip, Sirisha Bhogaraju, a Nobias 4-star rated author, recently described some of the catalysts for the negative sentiment that has surrounded GOOGL shares throughout recent weeks in an article published at Nasdaq.com.
GOOGL May 2022
In the aftermath of GOOGL’s Q1 report, Bhogaraju wrote, “Investors were particularly concerned about the slowdown in YouTube advertising revenue in Q1, Suspension [sic] of the company's commercial activities in Russia, the pullback in ad spending in Europe amid the Russia-Ukraine conflict, the impact of inflation and other macro headwinds on companies’ ad spending, and tough comparisons hurt YouTube’s Q1 advertising revenue.”
However, Bhogaraju is bullish on the company’s long-term future, highlighting several areas of growth that the company continues to invest in. She stated, “Alphabet continues to invest in lucrative areas, like its cloud business, which generated $5.8 billion of revenue in Q1, reflecting 44% of growth. Though the cloud division is still losing money, the company is optimistic about its future prospects amid growing transition of enterprises to the cloud.”
Bhogaraju continued, “Alphabet is also investing in YouTube to enhance the platform by adding features like YouTube Shorts and live shopping. YouTube Shorts, Alphabet’s attempt to compete against rival TikTok, is now garnering over 30 billion daily views, which is almost four times more than last year’s numbers.” She said that Google continues to invest in artificial technologies which bolster the capabilities of its digital search platform.
And, Bhogaraju said that “Alphabet is also positive about its other small businesses like its hardware products (e.g. FitBit, Pixel devices, Google Nest home products) and the Other Bets division (comprises its health technology solutions and self-driving car unit Waymo). Though still very small, it’s worth noting that Q1 revenue from Other Bets more than doubled to $440 million.”
Regarding the “buy the dip” mentality that we’re seeing when it comes to the sentiment surrounding GOOGL shares, Bhogaraju agrees. She concluded, “Wall Street analysts see the weakness in YouTube ad spending as a temporary headwind, and continue to be optimistic about Alphabet’s long-term prospects based on the dominance of Google search engine and YouTube, the growing Cloud business, and other opportunities.”
David Trainer, a Nobias 4-star rated author, recently published a bullish report on Alphabet at Seeking Alpha, titled, “Google: Big Value In Big Tech”. Trainer highlighted the company’s strong bottom-line results, stating: “Alphabet’s advertising business enables the company to generate strong free cash flow. Over the past five years, Alphabet generated cumulative FCF of $134.9 billion (9% of market cap), second only to Apple (AAPL) among companies in the S&P 500.
Over the TTM, Alphabet’s FCF of $54.6 billion is 1.2x the combined FCF of Microsoft (MSFT) and Meta Platforms (FB) and 32x the average TTM FCF of all S&P 500 companies.” He continued, noting that these strong cash flows enable Alphabet to invest heavily into its business (enhancing its future growth potential).
Trainer wrote, “Alphabet leverages its cash-generating advertising business to fund substantial research and development (R&D) spending, which creates a significant competitive advantage for the company. Alphabet’s five-year cumulative R&D spend is the most of all companies in the S&P 500”. He continued, “Alphabet’s R&D spending over the past five years is 1.5x Microsoft’s, 1.5x Apple’s, and 2x pharmaceutical giant Johnson & Johnson’s (JNJ) R&D spending.”
Regarding growth, Trainer said, “Alphabet is more than just an advertising business and its cloud segment drives further revenue growth.” He continued, stating that “cloud revenue rose from $4.1 billion in 2017 to $19.2 billion in 2021, or 48% compounded annually. Over the TTM, Google Cloud revenue is $21 billion and accounts for 8% of total revenue.”
Trainer touched upon the negative sentiment surrounding “big-tech” stocks because of anti-trust reforms and potential regulation coming from regulators in the United State and abroad; however, he ultimately concluded, “Over the long run, Alphabet is likely to navigate regulatory challenges and deliver profits. Indeed, its business has proven to be more resilient to privacy-related changes than Meta’s. Large incumbent companies are often best equipped to navigate highly regulated industries. Alphabet is armed with the cash, political savvy, and services that deliver a social good which could help the company widen its moat as it positions its business to comply with regulatory complexities.”
Trainer also highlighted the fact that as Alphabet attempts to diversify its revenue stream and moves away from a pure-play digital advertising company, its margins will likely fall (due to the incredibly high margins that the company generates with its Google properties in the advertising markets). Yet, he said, “As the company grows other segments of its business, those segments are not likely to match the high margins Alphabet’s advertising segment achieves, which could lower the company’s overall ROIC. Nonetheless, as long as other segments generate an ROIC above its weighted average cost of capital, the company will create more shareholder value as it grows economic earnings through these additional segments.”
Even with these risks in mind, Trainer believes that the stock is too cheap. He stated, “Concerns over political and regulatory risks have helped drive the stock down 21% year-to-date. However, given the resiliency of Alphabet’s business model, this decline provides investors with an attractive entry point.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Trainer continued, “The stock’s price-to-economic book value (PEBV) ratio is 1.1 is at its cheapest level since 2012, when the stock traded at just $354/share. A PEBV ratio of 1.1 means the market expects Alphabet’s NOPAT [net operating profit after tax] to grow to no more than 10% above TTM levels, which seems overly pessimistic.”
Not every analyst is overly bullish on GOOGL these days, however. Shanthi Rexaline, a Nobias 4-star rated author recently published an article which highlighted the opinion of KeyBanc Capital Markets analyst, Justin Patterson, who is a Nobias 4-star rated analyst, regarding the negative implication that Snap Incs (SNAP) recent profit warnings could have across the technology sector.
Rexaline examined Patterson’s report, stating that the analyst believes that Alphabet is one of six companies likely to face similar issues as Snap moving forward, resulting in both lower revenues and profit margins. Rexaline wrote, “The analyst sees more incremental risks to Google's margins, as its revenue shifts to low-margin, high-investment areas such as Cloud.”
Overall, 85% of recent reports that we’ve seen published by credible authors have expressed a “Bullish” sentiment on GOOGL shares. Right now, the average price target being applied to GOOGL by the credible Wall Street analysts that the Nobias algorithm tracks is $3262.78. Relative to today’s share price of $2277.84, this average price target represents upside potential of approximately 30.2%.
Disclosure: Of the stocks mentioned in this article, Nicholas Ward has long positions in GOOGL, AAPL, MSFT, FB, and JNJ. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.