IS ALPHABET A GOOD INVESTMENT?

February 6, 2022 0 By bullheadedbear
Alphabet Logo
Google Logo

Welcome to the (GOOGL) Alphabet investment review, where we look at Alphabet stock fundaments to try and answer the critical question: is Alphabet a good investment? Below you will find a detailed overview of Alphabets fundamentals and analysis, including valuation multiples, comparable analysis and see what the analysts think. We also look at discounted cash flow models (dcf) to calculate intrinsic value and try to understand, is Alphabet stock a buy at current valuations?

The data used in this Alphabet review has been gathered from a combination of SharePad, Finbox and the Alphabet investor relations website for a deeper dive into the financial statements.

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Table of Contents

Company Overview

Fundamental Analysis

Valuation Review

Valuation Summary

Company Overview

Alphabet Fundamentals Introduction

Alphabet Company Description

Alphabet Inc is a holding company, with Google, the Internet media giant, as a wholly-owned subsidiary.

Google generates 99% of Alphabet’s revenue, of which more than 85% is from online ads. Google’s other revenue is from sales of apps and content on Google Play and YouTube, as well as cloud service fees and other licensing revenue.

Sales of hardware such as Chromebooks, the Pixel smartphone, and smart home products, which include Nest and Google Home, also contribute to other revenue.

Alphabet’s moonshot investments are in its other bets segment, where it bets on technology to enhance health (Verily), faster Internet access to homes (Google Fiber), self-driving cars (Waymo), and more.

Alphabet Valuations

Current Share Price (m)$2,865.86Revenue (m)$257,637
Shares Outstanding662.12EBITDA (m)$91,155
Market Cap (m)$1,897,543EBITDA Margin35.4%
Cash (m)$20,945EV/EBITDA20.8x
Total Debt (m)$26,206Debt / EBITDA0.29x
Enterprise Value (m)$181,292P/E28.6
GOOGL Valuations

Alphabet Revenue Breakdown – Region

RegionRevenue ($m)%
United States$117,85445.7%
Europe, Middle East, and Africa$79,10730.7%
Asian-Pacific$46,12317.9%
Other Americas$14,4045.6%
GOOGL Revenue by Region

Alphabet Revenue Breakdown – Product

ProductRevenue ($m)%
Google Services$237,52992.2%
Google Cloud$19,20617.5%
Other Bets$7530.3%
GOOGL Revenue by Product

Alphabet Share Price History

Current Price:$2865.8652 WK Low:$2,007.5052 WK High:$2996.77
GOOGL Stock Price
GOOGL Share Price vs Index
SharePad

Alphabet Shareholder Ownership

 Shareholder  Holding ($m)  % 
The Vanguard Group, Inc.21.26.7%
T. Rowe Price Associates, Inc.13.84.3%
BlackRock Institutional Trust Company, N.A.12.33.9%
State Street Global Advisors (US)10.63.3%
Fidelity Management & Research Company LLC7.62.4%
Geode Capital Management, L.L.C.4.61.4%
Capital International Investors4.21.3%
AllianceBernstein L.P.3.11.0%
Capital Research Global Investors3.01.0%
Capital World Investors3.01.0%
Others234.573.8%
GOOGL Major Shareholders
GOOGL Ownership
GOOGL Major Shareholders

Alphabet Fundamental Analysis

Alphabet Income Statement

Alphabet Income Statement Waterfall – 2021

GOOGL Income Statement
GOOGL Income Statement

Cost of sales includes payments to distribution partners such as browsers providers, mobile carriers, equipment manufacturers and software developers. It also includes content costs and expenses related to data centres. Other Income consists of FX net gains as well as net gains from marketable and non-marketable securities and equity investments.

Alphabet Income Statment – 5 Year View

GOOGL Income Statement 5 year
GOOGL Income Statement – 5 Year

Revenue has grown significantly from $110,895m to $257,637m. After a stable couple of years, the net income margin also increased dramatically in 2021. 2021 also saw a good improvement in EBITDA margin following a steady decline over the last few years.  

Alphabet 5 Year Income Statement

($m)2017A2018A2019A2020A2021A
Sales Revenue110,855136,819161,857182,527257,637
Cost of Sales-45,583-59,549-71,896-84,732-110,939
Gross Profit65,27277,27089,96197,795146,698
Operating Expenses-36,358-44,675-54,033-56,571-67,984
Operating Income28,91432,59535,92841,22478,714
Other Income, net-2,9245541,3705,12810,867
Interest, net1,2031,7642,3271,7301,153
Income Before Taxes27,19334,91339,62548,08290,734
Income Taxes-14,531-4,177-5,282-7,813-14,701
Net Income12,66230,73634,34340,26976,033
     
EBITDA35,82941,63047,70954,92191,155
GOOGL 5 Year Income Statement

Alphabet Growth

GOOGL Growth
GOOGL Growth

Revenue growth has been declining over the last three years, with gross profit growth more or less static. Revenue growth, gross profit growth, and EBITDA growth have been steadily declining for the previous few years, but 2021 has seen a significant increase in growth. Net income growth was also considerably higher following a volatile few years due to taxes, fines and other investment gains (losses).

Alphabet Balance Sheet

Alphabet Assets – Fiscal Year End 2021

GOOGL Assets
GOOGL Assets

Assets look good with strong cash and short term investments. Short term investments include marketable securities.

Alphabet Liabilities – Fiscal Year End 2021

GOOGL Liabilities
GOOGL Liabilities

Other current liabilities include operating lease liabilities, payables to brokers, European Commission fines, accrued compensation and benefits and other accrued revenue share.

Alphabet Equity – Fiscal Year End 2021

GOOGL Equity
GOOGL Equity

Alphabet Balance Sheet – 5 Year View

GOOGL Balance Sheet
GOOGL Balance Sheet
SharePad

Alphabet Cash Flow Statement

Alphabet Cash Flow From Operations – Fiscal year End 2021

GOOGL Cash from Operations
GOOGL Cash Flow from Operations

Other operating activities include stock-based compensation and debt and equity securities net gain. Depreciation expense includes depreciation and impairment of property and equipment as well as amortisation and impairment of intangible assets.

Alphabet Cash From Financing – Fiscal Year End 2021

GOOGL Cash from Financing
GOOGL Cash from Financing

Other financial activities include net payments related to stock-based award activities and proceeds from the sale of interest in consolidated entities. The large share buyback is an excellent return for investors.

Alphabet Cash From Investing – Fiscal Year End 2021

GOOGL Cash from Investing
GOOGL Cash from Investing

Other investing activities include the net purchases and sales of marketable and non-marketable securities. Acquisition costs are predominantly made up of the Fitbit acquisition.

Alphabet Cash Flow Statement – 5 Year View

GOOGL 5 Year Cash Flow Statement
GOOGL Cash Flow Statement

The cash balance has reduced slightly from last year. Cash from operations increased significantly; however, heavy share buyback has driven substantial negative cash from financing. Fortunately, this negative cash from financing is a positive return to shareholders. Cash from investing continued to stay pretty static.

Finimize 50% off

Alphabet Valuation Review

Analysts View fo Alphabet

Analysts’ Price Targets for Alphabet

Analyst NameFirmPositionPrice TargetAction
Justin PostBank of America SecuritiesBuy3,510.00Maintained
Eric SheridanGoldman SachsBuy3,400.00Maintained
Mark MahaneyEvercore ISIBuy3,500.00Maintained
Aaron KesslerRaymond JamesBuy3,630.00Reiterated
Brian FitzgeraldWells FargoBuy3,600.00Maintained
Daniel SalmonBMO CapitalBuy3,300.00Maintained
Stephen JuCredit SuisseBuy3,500.00Maintained
Doug AnmuthJ.P. MorganBuy3,450.00Maintained
Brian WhiteMonnessBuy3,850.00Maintained
Youssef SqualiTruist FinancialBuy3,600.00Maintained
Lloyd WalmsleyUBSBuy3,900.00Maintained
Ross SandlerBarclaysBuy3,300.00Maintained
Deepak MathivananWolfe ResearchBuy3,600.00Maintained
Laura MartinNeedhamBuy3,200.00Maintained
Shyam PatilSusquehannaBuy3,750.00Maintained
Mark ShmulikBernsteinBuy3,500.00Maintained
Brent ThillJefferiesBuy3,600.00Maintained
Ygal ArounianWedbushBuy3,800.00Maintained
Justin PattersonKeyBancBuy3,400.00Maintained
Rohit KulkarniMKM PartnersBuy3,375.00Maintained
Brian NowakMorgan StanleyBuy3,450.00Maintained
Thomas ChampionPiper SandlerBuy3,475.00Maintained
Brad EricksonRBC CapitalBuy3,500.00Maintained
Colin SebastianRobert W. BairdBuy3,200.00Maintained
Scott DevittStifel NicolausBuy3,500.00Maintained
James LeeMizuho SecuritiesBuy3,600.00Reiterated
Michael MorrisGuggenheimBuy3,000.00Maintained
Andrew BooneJMP SecuritiesBuy3,300.00Reiterated
Unknown AnalystCFRABuy3,400.00Upgraded
Christophe CherblancSociete GeneraleBuy3,730.00Maintained
Ivan FeinsethTigress FinancialBuy3,540.00Reiterated
Jason BazinetCitigroupHold2,965.00Maintained
Maria RippsCanaccord GenuityBuy3,350.00Maintained
Jason HelfsteinOppenheimerBuy3,500.00Maintained
Joseph BonnerArgus ResearchBuy3,100.00Maintained
Ella JiChina Renaissance SecuritiesBuy3,368.00Maintained
Unknown AnalystKGI SecuritiesBuy3,000.00Initiated
Michael NathansonMoffettNathansonBuy2,800.00Maintained
Rob SandersonLoop Capital MarketsBuy2,525.00Upgraded
GOOGL Analyst Targets
GOOGL Analysts Price Targets
GOOGL Analysts’ Price Targets

Analysts’ targets range from $2,525 to $3,900, with an overall average of £3,412. Nearly all analysts have a buy rating. There are no sell ratings and no downgrades.

Analysts’ Consensus – Is Alphabet a Buy?

GOOGL Analysts Consensus
GOOGL Analysts Consensus

Analysts’ Recent Actions for Alphabet Stock

GOOGL Analysts Actions
GOOGL Analysts Actions
SharePad

Alphabet Comparable Analysis

Comparisons are made with companies that have similar business segments. However, caution should be taken as no two companies have exactly comparable businesses, and some have significantly different segments.

Alphabet Margin vs Competitors

GOOGL Margin
GOOGL Margin

xxxAlphabet is slightly above average for margin ratios, with Meta, Microsoft and Oracle even higher. Amazon and HP are significantly lower than the average.

Alphabet Liquidity vs Competitors

GOOGL Liquidity
GOOGL Liquidity

Alphabet has a significantly higher current and quick ratio than the average, with a slightly lower cash ratio. Only Meta has a higher current and quick ratio.

Alphabet Solvency vs Competitors

GOOGL Solvency
GOOGL Solvency

Net debt and total debt to EBITDA are significantly lower than the average. Only lower Meta lower debt to EBITDA ratios than Alphabet.

Alphabet Returns vs Competitors

GOOGL Returns
GOOGL Returns

Alphabet is above average for ROA and ROIC but below for ROE. However, Apple and Oracle are significantly lifting the average.

Alphabet Dividend Yield vs Competitors

GOOGL Dividend Yield
GOOGL Dividend Yield

Alphabet Dividend Payout Ratio vs Competitors

GOOGL Dividend Payout Ratio
GOOGL Dividend Ratio

Alphabet does not pay a dividend. The majority of these companies either do not pay a dividend or have a low dividend yield. HP and Oracle distribute dividends with a yield above 1%, and IBM is the standout dividend payer with a yield of 4.8%.

Alphabet PE – Price to Earnings vs Competitors

GOOGL PE
GOOL PE

Alphabet is slightly above average for P/E and slightly below for fc P/E. However, Amazon is pulling the average up with significantly higher P/E ratios.

Alphabet Price to Sales vs Competitors

GOOGL Price to Sales
GOOGL Price to Sales

Alphabet is above average, and Microsoft is significantly above. HP has the lowest price to sales in the group, with Amazon, Baidu and IBM also lower than the average.

Alphabet Price to Free Cash Flow vs Competitors

GOOGL Price to Free Cash Flow
GOOGL Price to Free Cash Flow

Netflix and Amazon were removed from the chart, and the average calculation due to negative cash flow significantly skewed the data. Alphabet is above average for P/FCF but slightly lower for fc P/FCF.

Alphabet EV/EBITDA vs Competitors

GOOGL EV/EBITDA
GOOGL EV/EBITDA

Alphabet above average EV/EBITDA multiple with only Amazon, Apple and Microsoft higher. Baidu and HP are both significantly lower.

Alphabet EV/Sales vs Competitors

GOOGL EV/Sales
GOOGL EV/Sales

Alphabet is also above the average for EV/Sales multiple. Apple and Microsoft are again higher, but Amazon is lower than the average this time. HP, again is significantly lower.

Is Alphabet Good Value ?- Comparable Valuation Multiples

GOOGL Comparable Valuations
GOOGLE Valuation Multiple

Based on average multiples (with certain outliers removed) and current financials, Alphabet has a valuation range of $2,309 – $2,700. Using the same multiples for the 5 year forecasted financials, the range is $4,555 – $5,058.

SharePad

Alphabet DCF – EBITDA Exit – Valuation & IRR

Alphabet DCF Assumptions

 Tax Rate16.2%
 Discount Rate8.4%
 Perpetual Growth Rate2%
 EV/EBITDA Multiple12.5x
 Transaction Date05/02/2022
 Fiscal Year-End31/12/2022
 Current Price2,865.86
 Shares Outstanding662
 Debt26,206
 Cash20,945
 Capex24,640
GOOGL DCF Assumptions

Alphabet Cash Flow Forecast

GOOGL Cash Flow Forecasts
GOOGL Cash Flow Forecast

Alphabet Terminal Value – EBITDA Exit

Final Forecast EBITDA196,262
EV/EBITDA Multiple12.5x
TERMINAL VALUE2,453,270
GOOGL Terminal Value – EBITDA Exit

Alphabet Intrinsic Value – EBITDA Exit

 Enterprise Value1,986,779
 Plus: Cash20,945
 Less: Debt26,206
 Equity Value1,981,518
 EQUITY VALUE / SHARE2,992.69
GOOGL Intrinsic Value – EBITDA Exit

Alphabet Market Value vs Intrinsic Value – EBITDA Exit

GOOGL Market vs Intrinsic
GOOGL Market Value vs intrinsic Value – EBITDA Exit

Based on the model assumptions using the EBITDA Exit Multiple, the intrinsic value is $2,993, which is $127 above the current market value (at the time of analysis).

 Market Value2,865.86
 Upside126.83
 Intrinsic Value2,992.69
GOOGL Upside – EBITDA Exit

Alphabet Investment -Internal Rate of Return (IRR)

 Target Price Upside4.4%
 Internal Rate of Return (IRR)9.4%
GOOGL IRR – EBITDA Exit

Alphabet Internal Rate of Return (IRR) vs Purchase Price

GOOGL IRR
GOOGL IRR vs Purchase PRice

Based on the model assumptions and the current market share price of $2,866, there is an internal rate of return of 9%. If the stock price dropped 20% to $2,293, the IRR would be 14.9%. If the stock price increases by 20% to $3,439, the IRR is 5.2%.

Finbox Get Started

Alphabet DCF – EBITDA Exit – Sensitivity Analysis

Variables’ Influence on Model

GOOGL Sensitivity Analysis
GOOGL DCF Model Sensitivity

Changes to the cost of sales have the most significant impact on this model but are very closely followed by the EV/EBITDA exit multiple. The revenue and the discount rate (WACC) are the next most important contributors. Finally, relative % changes to FCF have less of an impact.

The intrinsic value calculated from the model uses the assumptions: an EBITDA Exit Multiple of 12.5x, a discount rate of 8.4% and a final forecast EBITDA of $196,262. The tables to the right show the intrinsic value based on different assumption scenarios.

Impact on Intinsic Value Price Per Share

GOOGL Sensitivity Analysis EV/EBITDA
GOOGL DCF Sensitivity – EV/EBITDA

Bear Case Price = $2,488.88
Uplift vs Market Value = 13.2%

Bull Case Price   = $3,536.40
Uplift vs Market Value = 23.4%

GOOGL Sensitivity Analysis Discount Factor
GOOGL DCF Sensitivity – Discount Factor

Bear Case Price = $2,637.36
Uplift vs Market Value = -8.0%

Bull Case Price   = $3,399.20
Uplift vs Market Value = 18.6%

SharePad

Alphabet DCF – Perpetual Growth Rate – Valuation & IRR

Alphabet Assumptions

 Tax Rate16.2%
 Discount Rate8.4%
 Perpetual Growth Rate2%
 EV/EBITDA Multiple12.5x
 Transaction Date05/02/2022
 Fiscal Year-End31/12/2022
 Current Price2,865.86
 Shares Outstanding662
 Debt26,206
 Cash20,945
 Capex24,640
GOOGL DCF Assumptions

Alphabet Cash Flow Forecast

GOOGL Cash Flow Forecasts
GOOGL Cash Flow Forecast

Alphabet Terminal Value – Perpetual Growth

Final Forecast FCFf119,494
Perpetual Growth Rate2.0%
TERMINAL VALUE1,902,831
GOOGL Terminal Value – Perpetual Growth

Alphabet Intrinsic Value – Perpetual Growth

 Enterprise Value1,616,256
 Plus: Cash20,945
 Less: Debt26,206
 Equity Value1,610,995
 EQUITY VALUE / SHARE2,433.09
GOOGL Intrinsic Value – Perpetual Growth

Alphabet Market Value vs Intrinsic Value – Perpetual Growth

GOOGL Market vs Intrinsic Value
GOOGL Market Value vs Intrinsic Value – Perpetual Growth

Based on the model assumptions using the perpetual growth rate, the intrinsic value is $2,433, which is $433 lower than the current market value (at the time of analysis).

 Market Value2,865.86
 Upside-432.77
 Intrinsic Value2,433.09
GOOGL Upside

Alphabet – Internal Rate of Return (IRR)

 Target Price Upside-15%
 Internal Rate of Return (IRR)5%
GOOGL IRR

Alphabet Internal Rate of Return (IRR) vs Purchase Price

GOOGL IRR
GOOGL IRR vs Purchase Price

Based on the model assumptions and the current market share price of $2,865.86, there is an internal rate of return of 5%. If the stock price dropped 20% to $2,293, the IRR would be 9.8%, and if the price increased 20% to $3,439, the IRR would be 0.5%

Alphabet DCF – Perpetual Growth Rate – Sensitivity Analysis

Variables’ Influence on Model

GOOGL Sensitivity Analysis - Variables
GOOGL DCF Model Sensitivity

Changes to the cost of sales and the discount rate (WACC) have the most significant impact on this model. You can also see that a 10% reduction in the WACC results in a larger proportional impact than a 10% increase. FCF and revenue have the subsequent most prominent effects, with the perpetual growth rate having the lowest impact.

However, this chart is based on relative % movements. Therefore, the perpetual growth rate could vary much larger than the other variables. For example, a change from 2% to 3% is a 50% increase, which you are less likely to see for the other variables.

The model assumptions show a Perpetual Growth Rate of 2%, WACC of 8.4% and final forecast FCFf of $119,494. The tables to the right show the intrinsic value based on different assumption scenarios. 

Impact on Intrinsic Value Per Share

GOOGL Sensitivity Analysis - Perpetual Growth
GOOGL Sensitivity – Perpetual Growth

Bear Case Price = $2,066.53
Uplift vs Market Value = -27.9%

Bull Case Price   = $2,935.26
Uplift vs Market Value = 2.4%

GOOGL Sensitivity Analysis - WACC
GOOGL Sensitivity – WACC

Bear Case Price = $1,746.60
Uplift vs Market Value = -39.1%

Bull Case Price   = $3,776.48
Uplift vs Market Value = 31.8%

Alphabet Valuation Summary

Alphabet Valuation Football Field Chart

GOOGL Valuation Football Field
GOOGL Valuation Football Field

Is Alphabet a good investment?

Alphabet is currently trading at the higher end of its 52-week average.

Alphabet is also overvalued when using multiples from comparable companies.

The DCF calculations show the current price is overvalued and doesn’t provide strong returns.

The most positive valuation view of Alphabet comes from the analysts’ consensus and price predictions.

The price would have to reduce significantly, or results lean heavily towards the bull case for Alphabet to deliver strong returns based on this analysis.

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Disclosure

I/we have open long positions in Alphabet/Google. We do not intend to add or reduce these positions in the coming week.

This analysis has been written by a Bull Headed Bear analyst/author for Bull-Headed-Bear.com. I/we receive no compensation for this post other than any payments received from ads or affiliate links.