It hasn't been a great afternoon session for Alphabet investors, who have watched their shares sink by -2.2% to a price of $160.69. Some of you might be wondering if it's time to buy the dip. If you are considering this, make sure to check the company's fundamentals first to determine if the shares are fairly valued at today's prices.
an Increase in Expected Earnings Improves Its Value Outlook but Priced Beyond Its Margin of Safety:
Alphabet Inc. offers various products and platforms in the United States, Europe, the Middle East, Africa, the Asia-Pacific, Canada, and Latin America. The company belongs to the Technology sector, which has an average price to earnings (P/E) ratio of 30.01 and an average price to book (P/B) ratio of 3.91. In contrast, Alphabet has a trailing 12 month P/E ratio of 23.1 and a P/B ratio of 6.58.
P/E rations can be placed into context by dividing them by the firm's expected 5-year EPS growth rate, which gives us its Price to Earnings Growth (PEG) ratio. Alphabet's PEG ratio is 1.05, which tells us the company is fairly valued in terms of growth. PEG ratios under 1 are considered an indicator of undervalued growth, but we need to keep in mind that many successful companies with excellent share performance have maintained much higher PEG ratios.
As always, a quantitative approach to a stock should be supplemented with a look at qualitative factors, such as the competence of its management team, quality of its corporate culture, and the wide variety of social and economic factors that can impact the success of its product.
Strong Revenue Growth and Healthy Leverage Levels:
2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
---|---|---|---|---|---|---|
Revenue (M) | $136,819 | $161,857 | $182,527 | $257,637 | $282,836 | $307,394 |
Operating Margins | 20% | 21% | 23% | 31% | 26% | 27% |
Net Margins | 22% | 21% | 22% | 30% | 21% | 24% |
Net Income (M) | $30,736 | $34,343 | $40,269 | $76,033 | $59,972 | $73,795 |
Net Interest Expense (M) | $114 | $100 | $135 | $346 | $357 | $308 |
Depreciation & Amort. (M) | $871 | $925 | $792 | $10,273 | $13,475 | $6,487 |
Diluted Shares (M) | 13,906 | 13,904 | 13,746 | 13,483 | 13,219 | 12,764 |
Earnings Per Share | $2.21 | $2.47 | $2.93 | $5.64 | $4.54 | $5.78 |
EPS Growth | n/a | 11.76% | 18.62% | 92.49% | -19.5% | 27.31% |
Avg. Price | $55.66 | $59.42 | $74.07 | $125.53 | $126.61 | $160.95 |
P/E Ratio | 25.19 | 24.06 | 25.28 | 22.26 | 27.89 | 27.94 |
Free Cash Flow (M) | $22,832 | $30,972 | $42,843 | $67,012 | $60,010 | $69,495 |
CAPEX (M) | $25,139 | $23,548 | $22,281 | $24,640 | $31,485 | $32,251 |
EV / EBITDA | 26.86 | 23.1 | 23.93 | 18.95 | 18.87 | 22.59 |
Total Debt (M) | $5,341 | $4,554 | $13,932 | $14,817 | $14,701 | $13,253 |
Net Debt / EBITDA | -0.4 | -0.4 | -0.3 | -0.07 | -0.08 | -0.12 |
Current Ratio | 3.92 | 3.37 | 3.07 | 2.93 | 2.38 | 2.1 |
Alphabet has rapidly growing revenues and increasing reinvestment in the business, strong operating margins with a positive growth rate, and generally positive cash flows. The company also benefits from an excellent current ratio of 2.1, a strong EPS growth trend, and healthy leverage levels.