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Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) the stock traded in the price range of $ 1,140 to $ 1,265 per share since its earnings announcement on July 25. The company's sales increased 26% year-on-year. With traded shares at a reasonable valuation, is the Alphabet stock a buy? The rebound in the company's flagship advertising business, as well as the growth of the cloud business, are powerful catalysts for the future. However, several risks remain, which could lead to a drop in GOOGL's share price.
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Let's take a closer look at the stock of GOOGL and see what lies ahead for the actions of the research giant.
A closer look at Alphabet Stock
Alphabet posted a quarterly profit of $ 14.21 per share in the second quarter. That exceeded expectations of $ 2.75 per share. As mentioned above, this is due to the rebound of the company's advertising activity. Sales jumped from $ 28 billion in Q2 2018 to $ 32.6 billion in Q2 2019. Alphabet's non-advertising revenues grew even more impressive. Sales grew about 40% from one year to the next, from $ 4.4 billion to $ 6.2 billion.
Earnings from operations were $ 9.2 billion, up from $ 8.1 billion in the prior year quarter. With the market results report that absorbed the market last month, what is the next step for the Alphabet action? Shares continue to be down from their peak of $ 1296.98 for 52 weeks. The material advantage could be a challenge. A multitude of risks could affect the course of GOOGL action.
Regulation and competition are risks for GOOGL's course of action
With operating cash flow of approximately $ 50.8 billion, the company has plenty of capital to increase shareholder value. Although the company loses approximately $ 1 billion per quarter of its "Other Bets" growth initiatives, it is only a drop in the bucket. With more cash than opportunities, the company announced a $ 25 billion share buyback plan. This is modest compared to the market capitalization of Alphabet ($ 831 billion). As InvestorPlace Todd Shriber, a contributor, explained that on August 15, Alphabet could easily invest its $ 121 billion in cash in a massive buyout. This would really move the needle for the GOOGL stock.
The GOOGL share price is facing a downside risk due to increased regulatory pressure. The $ 5 billion fine imposed by the European Commission last year is just the beginning. In the United States, politicians on both sides of the aisle want to give up Alphabet. Additional moves by US regulators will lead to a further drop in equities.
Beyond government regulation, the Alphabet's actions could face headwinds as the technology space evolves. While Google has created a license to print money with search advertising, cloud computing is very competitive. Rivals such as Amazon (NASDAQ:AMZN) Amazon Web Server governs the market. In this and other growing areas, GOOGL will not have the 80% market share it holds in online research. Future growth opportunities will not be cash cows like search engine advertising.
In this spirit, is the current valuation of the GOOGL stock justified? Compared to his peers "FAANG" – Facebook (NASDAQ:FB) Apple (NASDAQ:AAPL), Amazon, Netflix (NASDAQ:NFLX) and Google – Alphabet seems undervalued. But given the opportunities and risks, this valuation could be justified.
Shares remain undervalued compared to FAANG peers
The GOOGL stock is a component of FAANG. Compared to this estimated group of technology giants, GOOGL's shares are trading at a lower price. The forward price / earnings ratio of the Alphabet is just under 22. The Company's Value / EBITDA ratio is 16.3.
Here are the valuation ratios for the rest of the FAANG components:
Facebook: before P / E of 19.6 and EV / EBITDA of 18.1
Amazon: Before P / E of 54.7 and EV / EBITDA of 27.7
Apple: before P / E of 16.5 and EV / EBITDA of 12.4
Netflix: P / E futures of 54.9 and VE / EBITDA of 72.2
You can argue that GOOGL has less track than NFLX and AMZN. But both reach the limits of scale themselves. Alphabet has the capital to chase the opportunities that the rest of FAANG is aiming for. Each of them has the opportunity, but not the advantage, to dominate these markets. With Alphabet shares offering today's earnings and growth opportunities tomorrow, it may well be the best of the group to own.
Conclusion on the GOOGL stock
Compared to other large high-tech groups, the GOOGL stock is a good deal. Shares are trading at a price slightly lower than Facebook and at a substantial price to Amazon and Netflix. But unlike the last two, Google has reached the status of "cash cow". With more capital than they can spend, the Alphabet stock needs a big catalyst to move the needle.
Meanwhile, regulation and competition remain big risks. With Washington putting Alphabet on its line of sight, the company could face significant headwinds. The new frontiers of technology (cloud computing, artificial intelligence) are very competitive. Alphabet will probably not find another cash cow to complement its search advertising activities. These two threats could lead to a significant drop in the price of GOOGL shares.
Given these factors, what is the call? If you are looking for a growth stock with a reasonable valuation, consider GOOGL. But with the specter of recession announcing, investors may soon have the opportunity to get into GOOGL's stock at a lower point of entry.
At the time of writing, Thomas Niel did not hold a position on any of the above titles.
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