Alphabet Inc (GOOG, Financial) recently experienced a daily loss of 2.17%, yet it has gained 13.64% over the past three months. With an Earnings Per Share (EPS) of 6.52, investors and analysts are keen to determine if the stock is modestly overvalued. This article delves into Alphabet's valuation to provide a clearer picture of its financial standing and market position.
Company Overview
Alphabet, the parent company of internet behemoth Google, earns nearly 90% of its revenue from online ads, with other significant contributions from Google Play, YouTube, and hardware sales like the Pixel smartphone and Google Home products. Google's cloud computing ventures represent a little over 10% of total revenue. Alphabet also invests in ambitious 'moonshot' projects through its other bets segment, which includes ventures like Verily for health, Google Fiber for faster internet, and Waymo for self-driving cars.
The company's current stock price stands at $166.6, with a market capitalization of $2 trillion, against a GF Value of $150.5, suggesting that the stock might be modestly overvalued.
Understanding GF Value
The GF Value is a proprietary measure reflecting the true value of a stock, calculated based on historical trading multiples, a GuruFocus adjustment factor from past performance, and future business performance expectations. This metric suggests that Alphabet's stock should ideally trade around the GF Value line. If the stock price significantly surpasses this line, it may indicate an overvaluation, leading to potentially lower future returns. Conversely, trading below this line could signal undervaluation and possibly higher future returns.
Financial Strength and Stability
Investing in a company with robust financial health is crucial. Alphabet's cash-to-debt ratio stands at 3.85, indicating a strong position despite being lower than 53.49% of its peers in the Interactive Media industry. The company's overall financial strength is rated 9 out of 10, highlighting its capacity to manage debts effectively.
Profitability and Growth Prospects
Alphabet has maintained profitability over the past decade, with a remarkable operating margin of 29.03%, ranking better than 90.17% of its industry counterparts. The company's revenue over the last twelve months was $318.10 billion with consistent earnings growth, reflecting strong market performance and business resilience.
Growth is another vital aspect of Alphabet's appeal to investors. The company's average annual revenue growth rate is 22.1%, outperforming 74.76% of competitors in the Interactive Media industry. This sustained growth underscores Alphabet's ability to expand its business and market share effectively.
ROIC vs. WACC: A Comparative Analysis
An essential metric for evaluating profitability and investment potential is the comparison between Return on Invested Capital (ROIC) and the Weighted Average Cost of Capital (WACC). Alphabet's ROIC is an impressive 31.66, significantly higher than its WACC of 10.9, indicating efficient capital management and promising shareholder returns.
Conclusion
While Alphabet (GOOG, Financial) appears modestly overvalued based on current metrics and GF Value, the company's strong financial health, robust profitability, and solid growth prospects may justify a premium. Investors should keep a close watch on these factors and consider the long-term potential of Alphabet's diverse business operations. For a deeper dive into Alphabet's financials, visit Alphabet's 30-Year Financials.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
