Alphabet Jumps Well Past My Fair Value

Stock (Symbol)

Alphabet (GOOGL)

Stock Price

$971

Sector

Technology

Data is as of

June 13, 2017

Expected to Report

Jul 26

Company Description

Alphabet Inc is a collection of Companies. Alphabet’s collection include Calico, Google’s health and longevity effort; Nest its connected home business; Fiber, its gigabit internet arm; and its investment divisions such as Google Ventures and Google Capital, and incubator projects, such as Google X. Source: Thomson Financial

Sharek’s Take

Alphabet (GOOGL) stock has shot up in price as tech stocks took investors’ attention (and dollars). But now the stock is high as the P/E is up from 19 to 29 during the past two qtrs. The P/E us up so much due to the rapid rise in the stock price and an accounting change that took down profit estimates. Last qtr Alphabet had its profit estimates slashed when management said it would no longer exclude stock-based compensation from its results. That move caused 2017 estimates $41.02 to $33.43 and 2018’s from $47.91 to $38.99. Now GOOGL has delivered single-digit profit growth the past 2 qtrs even though revenues grew 22%. Last qtr’s results were very good, with ad revenue driven by mobile search and YouTube video advertising. Cloud revenue was also strong. For a long time I wished GOOGL would earn a 25 P/E, and now it has — and then some. Last qtr I felt “this is a good time to take profits and sell some shares” and now the stock is even higher. Alphabet cleared $1000 a share last month, even though profit growth was just 3%. And with a P/E of 29 I feel GOOGL is expensive. My 2017 Fair Value is $849, and I think this tech heavyweight was pushed higher due to an influx of money flowing into tech ETFs.

One Year Chart

Wow, this stock shot from $850 to $1000 in just one qtr. Last qtr GOOGL delivered 22% sales growth for the 2nd straight qtr and 3% profit growth, which beat the -1% estimate. 2017 estimates were raised from $33.43 to $33.95, but are still expected to be less than last year’s profits. Qtrly profit Estimates also rose, and now analysts expect -2%, -7%, 3% and 16% growth. The Est. LTG of 19% is excellent for a conservative stock such as this.

Fair Value

For years I have felt this stock deserved a P/E around 30. 20% growers that do it every year deserve a premium price. But the stock market didn’t agree with me, and saddled the stock with a 21-22 P/E. So I pegged my Fair Value at a P/E of 25 as it is very difficult to get a P/E to rise to another level. Now that the P/E is 29, I don’t think that can hold.

Bottom Line

Alphabet is a core holding for both growth and conservative investors. The company is a juggernaut that raises revenues and profits around 15% a year. It’s never had a down year in profits! But something recently happened in the stock market that caused these old tech stocks to surge higher. I think it was an influx of funds into tech ETFs. Now I think either these big techs need to (1) correct 10% or (2) go flat for a year just to get to their Fair Values. GOOGL ranks 29th in the 30 stock Growth Portfolio Power Rankings and 19th in the 34 stock Conservative Portfolio Power Rankings.