Is Alphabet Stock (GOOG) Undervalued? Share Price Sinks!

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by Teuta Franjkovic · 4 min read
Is Alphabet Stock (GOOG) Undervalued? Share Price Sinks!
Photo: Pavlos Giorkas / Flickr

The last of the FAANG stocks to announce earnings, Alphabet [GOOGL] made $39.3bn in the fourth quarter, a 22% jump from the previous quarter, and $136.8bn up 23% year-on-year.

Costs per click on Google’s advertising fell 29% from last year, signaling to shareholders that pricing pressure from its competitors is heightening.

Google’s parent company announced earnings per share of $12.77 that beat analysts’ expectations of $10.86, and its bottom line was further lifted by a $1.3bn investment related to “a non-marketable debt security”.

Ruth Porat, CFO of Alphabet and Google, said:

“With great opportunities ahead, we continue to make focused investments in the talent and infrastructure needed to bring exceptional products and experiences to our users, advertisers and partners around the globe.”

The company’s share price started 2019 positively, gaining 16.7% from its 52-week low although it is still down 4.8% year-to-date. The results led its stock to rise 1.9%, closing at $1132.80.

Investors have identified the tech company Alphabet Inc. as an interesting stock but before investments are made there, an in-depth look at its trading activities will have to be conducted. The share is trading with a market value of around 780.32B, the company now has both obstacles and catalysts that affect them and they came from their mode of operations. With the company affected by events currently, it is a perfect time to analyze the numbers behind the firm in order to come up with a rather realistic picture of what this stock is.

Alphabet Inc. Fundamentals Have to be Considered

When analyzing a stock, the first fundamental thing to take into account is the balance sheet. How healthy the balance sheet of a company is will determine if the company will be able to carry out all its financial and non-financial obligations and also keep the faith of its investors.

For GOOG, the company has in raw cash 13.44 billion on their books with 3.79 billion currently as liabilities. How the trend is over time is what investors should be concerned about. The company has a healthy balance sheet as their debt profile has been on an incline. In terms of their assets, the company currently has 129.7 billion total, with 0 as their total liabilities. This figure have given the company a good sense of viability under numerous contexts.

The Google division is still growing revenue at over 20% year over year, and it produces big sums of cash that Alphabet can invest in different areas with enormous potential for disruption. For this reason, Alphabet doesn’t need to worry about external financing or short-term profitability for its other bets projects, and it can have a true long-term approach to developing the most promising futuristic technologies.

Investment Thesis

In an environment where many FAANGs (and related stocks) are faltering, and seeing their top-lines post decelerating growth, Alphabet once again delivered strong results.

Does it mean that shareholders are no longer ‘long’ and passionate about Alphabet? Admittedly, the tech giant did have some small hiccups in its performance during the quarter, but overall, I continue to be very bullish Alphabet and consider it meaningfully undervalued.

Alphabet’s top line was once again strong at 23% YoY (constant currency). However, Q4 ’18 was weighed down by heavy investments and acquisition costs, which culminated with Alphabet’s operating income only being up 7% to $8.2 billion.

Netflix vs. Alphabet: Which One to Buy?

We already wrote of how Netflix and Alphabet certainly have a way of keeping our attention. American Netflix subscribers spend an average of an hour and 40 minutes per day watching the streaming service. YouTube’s 1.8 billion monthly active users stream an hour of video per day on their mobile devices alone.

Netflix and Alphabet are at the forefront of two related megatrends: the shift to streaming video from traditional linear television (i.e., cord-cutting) and the natural shift of advertising budgets to follow eyeballs from television and other traditional media to digital media.

Netflix has nearly 60 million U.S. subscribers and another 80 million international subscribers to its streaming video service. Revenue grew 35% in 2018, faster than the 26% growth in paid memberships thanks to strategic price increases in certain markets.

After increasing prices for U.S. members at the start of 2019, Netflix could expect to see another year of 20%-plus growth in U.S. revenue. That growth might slow next decade as more competition enters the market and price increases become harder to sustain.

Netflix’s strong international membership growth ought to continue, however, as Netflix’s content library becomes increasingly global. International revenue grew more than 50% in 2018, and there’s no sign of a slowdown in membership growth. That ought to ensure Netflix can maintain a high overall revenue growth rate for the foreseeable future, even as growth slows in its domestic market.

Don’t forget, Alphabet has built a massive revenue stream from advertising on its properties, including YouTube, Google Search, and Gmail. Meanwhile, Netflix’s ad-free model relies on a growing subscriber base and consistently raising prices.a

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