Alphabet Inc. (GOOGL)

Equity
US
Communication Services

RISK

RETURN

Key risk factors

Negligible price volatility

Strong & resilient to price shocks

Low default risk

Key return factors

Very strong margins and returns

Greatly overvalued vs peers

Very low or no dividends

Corporate actions & dividendsDividend of USD 0.200 with an ex-date of 10 Jun 2024.

Company profileAlphabet Inc. provides various products and platforms in the United States, Europe, the Middle East, Africa, the Asia-Pacific, Canada, and Latin America. It operates through Google Services, Google Cloud, and Other Bets segments. The Google Services segment offers products and services, including ads, Android, Chrome, hardware, Gmail, Google Drive, Google Maps, Google Photos, Google Play, Search, and YouTube. It is also involved in the sale of apps and in-app purchases and digital content in the Google Play store; and Fitbit wearable devices, Google Nest home products, Pixel phones, and other devices, as well as in the provision of YouTube non-advertising services. The Google Cloud segment offers infrastructure, platform, and other services; Google Workspace that include cloud-based collaboration tools for enterprises, such as Gmail, Docs, Drive, Calendar, and Meet; and other services for enterprise customers. The Other Bets segment sells health technology and internet services. The company was founded in 1998 and is headquartered in Mountain View, California.

Valuation: Greatly overvalued

Multiple

TTM

NTM

P/E

26.60

23.30

PEG

1.50

P/B

7.50

5.70

P/S

6.90

6.30

P/FCF

31.70

27.00

EV/EBITDA

20.20

19.70

Based on key historical and expected multiples, the stock is greatly overvalued relative to its peers. Specifically, the stock is expensive' on P/E, overvalued on EV/EBITDA, and overpriced on P/FCF.

Performance: Decent

The stock's performance has been mixed in the past six months, with growth following a decline. There is no clear price trend compared to its global peers from the same sector and industry (as shown above). The stock has outperformed this peer group by 25ppts over past six months and grown 11ppts faster in the past month. This is largely true for peers from the same country and sector. With respect to the stock's valuation against its peers, its overall price performance is 'fair'.

Analyst view: Neutral

The average target price is 192 and suggests 9% upside potential. Usually, this means a HOLD recommendation among investment firms. This neutral recommendation suggests no significant price movement, up or down, in the next 12 months. The most optimistic analyst has a target price of 225.0. This translates into 28% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 114.8. This is equivalent to 35% downside potential in the worst case.

Profitability: Very strong

RoE

Alphabet Inc. reported a return on equity (RoE) of 28.6% in the last 12 months, up from 23.6% in FY22. The market consensus projects an RoE of 34.3% in FY24, again ahead of its peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 20.4% in the last 12 months, an increase from 16.6% in FY22. The market analysts predict that RoA will be 24.2% in FY24, again stronger than its peers.

RoCE

In the last 12 months, the return on capital employed (RoCE) grew to 25.3%, above the peers. The consensus estimate for FY24 for RoCE is 36.2%, again ahead of the peers.

Net margin

EBITDA margin

Historically, GOOGL has reported very strong net margins compared to its global peers. Specifically, in the last 12 months, this metric equalled 25.9%, a growth from 21.2% in FY22. The company has reported good EBITDA margins compared to its global peers in recent years. EBITDA margin amounted to 34.1% in the last 12 months, up from 33.2% in FY22.

RoIC / WACC = 3.2(excellent value creation)

The ratio of return on invested capital (RoIC) to the weighted average cost of capital (WACC) has been 3.2 in the past several years. This ratio implies a excellent shareholder value creation.

Growth: Good

Revenue

EBITDA

EPS

Free cash flow

GOOGL reported revenue of USD 318 146mn in the last 12 months, up 3% from FY23. At the same time, the dynamics of cash flow, as measured by free cash flow (FCF), were drastically different. EPS grew 12% from FY23 to USD 6.59. Market expects EPS to reach USD 7.56 in FY24.Revenue growth has been moderate in the past several years (positive-to-neutral), while EBITDA growth has been steady. This all contributed to fast EPS growth (positive). The FCF trend is in line with EBITDA. We emphasize the highly volatile dynamics of EBITDA, EPS and FCF.

Dividends: Very low or none

The company does not pay dividends at all, or it pays them sporadically.

Default risk: Low

The risk of default is low. We note robust profitability, solid return on capital, strong debt servicing capacity, adequate interest coverage, solid cash flow generation, and an favourable capital structure, among the positive credit factors. Among the negative credit factors, we point to excessive margin volatility.

Volatility: Negligible

In normal market circumstances, GOOGL is not volatile. Put differently, without outstanding market volatility or shocking company news, the stock's price will stay within a narrow range. The stock's losses on its worst days (less than 1-5% of the time) will range from very low to minimal. We would also like to highlight the minimal intraday volatility of the instrument.

Stress-test: Negligible

In highly turbulent market conditions, GOOGL is not volatile. In other words, the stock will fall far less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be very low.

Selling difficulty: Low

GOOGL boasts high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and is average on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.

Country risk: Very low

The institutional, legal, and compliance risks associated with the company's country are minimal. In combination with stringent business standards, shareholder rights are very highly protected.

Other risks: Negligible

No other major risks have been identified.