IS ALPHABET A GOOD INVESTMENT?
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
- Analysts Targets
- Comparable Analysis
- DCF – EBITDA Exit – Valuation & IRR
- DCF – EBITDA Exit – Sensitivity Analysis
- DCF – Perpetual Growth Rate – Valuation & IRR
- DCF – Perpetual Growth Rate – Sensitivity Analysis
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) | $2,865.86 | Revenue (m) | $257,637 |
| Shares Outstanding | 662.12 | EBITDA (m) | $91,155 |
| Market Cap (m) | $1,897,543 | EBITDA Margin | 35.4% |
| Cash (m) | $20,945 | EV/EBITDA | 20.8x |
| Total Debt (m) | $26,206 | Debt / EBITDA | 0.29x |
| Enterprise Value (m) | $181,292 | P/E | 28.6 |
Alphabet Revenue Breakdown – Region
| Region | Revenue ($m) | % |
| United States | $117,854 | 45.7% |
| Europe, Middle East, and Africa | $79,107 | 30.7% |
| Asian-Pacific | $46,123 | 17.9% |
| Other Americas | $14,404 | 5.6% |
Alphabet Revenue Breakdown – Product
| Product | Revenue ($m) | % |
| Google Services | $237,529 | 92.2% |
| Google Cloud | $19,206 | 17.5% |
| Other Bets | $753 | 0.3% |
Alphabet Share Price History
| Current Price: | $2865.86 | 52 WK Low: | $2,007.50 | 52 WK High: | $2996.77 |
Alphabet Shareholder Ownership
| Shareholder | Holding ($m) | % |
| The Vanguard Group, Inc. | 21.2 | 6.7% |
| T. Rowe Price Associates, Inc. | 13.8 | 4.3% |
| BlackRock Institutional Trust Company, N.A. | 12.3 | 3.9% |
| State Street Global Advisors (US) | 10.6 | 3.3% |
| Fidelity Management & Research Company LLC | 7.6 | 2.4% |
| Geode Capital Management, L.L.C. | 4.6 | 1.4% |
| Capital International Investors | 4.2 | 1.3% |
| AllianceBernstein L.P. | 3.1 | 1.0% |
| Capital Research Global Investors | 3.0 | 1.0% |
| Capital World Investors | 3.0 | 1.0% |
| Others | 234.5 | 73.8% |
Alphabet Fundamental Analysis
Alphabet Income Statement
Alphabet Income Statement Waterfall – 2021
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
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) | 2017A | 2018A | 2019A | 2020A | 2021A |
| Sales Revenue | 110,855 | 136,819 | 161,857 | 182,527 | 257,637 |
| Cost of Sales | -45,583 | -59,549 | -71,896 | -84,732 | -110,939 |
| Gross Profit | 65,272 | 77,270 | 89,961 | 97,795 | 146,698 |
| Operating Expenses | -36,358 | -44,675 | -54,033 | -56,571 | -67,984 |
| Operating Income | 28,914 | 32,595 | 35,928 | 41,224 | 78,714 |
| Other Income, net | -2,924 | 554 | 1,370 | 5,128 | 10,867 |
| Interest, net | 1,203 | 1,764 | 2,327 | 1,730 | 1,153 |
| Income Before Taxes | 27,193 | 34,913 | 39,625 | 48,082 | 90,734 |
| Income Taxes | -14,531 | -4,177 | -5,282 | -7,813 | -14,701 |
| Net Income | 12,662 | 30,736 | 34,343 | 40,269 | 76,033 |
| EBITDA | 35,829 | 41,630 | 47,709 | 54,921 | 91,155 |
Alphabet 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
Assets look good with strong cash and short term investments. Short term investments include marketable securities.
Alphabet Liabilities – Fiscal Year End 2021
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
Alphabet Balance Sheet – 5 Year View
Alphabet Cash Flow Statement
Alphabet Cash Flow From Operations – Fiscal year End 2021
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
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
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
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.
Alphabet Valuation Review
Analysts View fo Alphabet
Analysts’ Price Targets for Alphabet
| Analyst Name | Firm | Position | Price Target | Action |
| Justin Post | Bank of America Securities | Buy | 3,510.00 | Maintained |
| Eric Sheridan | Goldman Sachs | Buy | 3,400.00 | Maintained |
| Mark Mahaney | Evercore ISI | Buy | 3,500.00 | Maintained |
| Aaron Kessler | Raymond James | Buy | 3,630.00 | Reiterated |
| Brian Fitzgerald | Wells Fargo | Buy | 3,600.00 | Maintained |
| Daniel Salmon | BMO Capital | Buy | 3,300.00 | Maintained |
| Stephen Ju | Credit Suisse | Buy | 3,500.00 | Maintained |
| Doug Anmuth | J.P. Morgan | Buy | 3,450.00 | Maintained |
| Brian White | Monness | Buy | 3,850.00 | Maintained |
| Youssef Squali | Truist Financial | Buy | 3,600.00 | Maintained |
| Lloyd Walmsley | UBS | Buy | 3,900.00 | Maintained |
| Ross Sandler | Barclays | Buy | 3,300.00 | Maintained |
| Deepak Mathivanan | Wolfe Research | Buy | 3,600.00 | Maintained |
| Laura Martin | Needham | Buy | 3,200.00 | Maintained |
| Shyam Patil | Susquehanna | Buy | 3,750.00 | Maintained |
| Mark Shmulik | Bernstein | Buy | 3,500.00 | Maintained |
| Brent Thill | Jefferies | Buy | 3,600.00 | Maintained |
| Ygal Arounian | Wedbush | Buy | 3,800.00 | Maintained |
| Justin Patterson | KeyBanc | Buy | 3,400.00 | Maintained |
| Rohit Kulkarni | MKM Partners | Buy | 3,375.00 | Maintained |
| Brian Nowak | Morgan Stanley | Buy | 3,450.00 | Maintained |
| Thomas Champion | Piper Sandler | Buy | 3,475.00 | Maintained |
| Brad Erickson | RBC Capital | Buy | 3,500.00 | Maintained |
| Colin Sebastian | Robert W. Baird | Buy | 3,200.00 | Maintained |
| Scott Devitt | Stifel Nicolaus | Buy | 3,500.00 | Maintained |
| James Lee | Mizuho Securities | Buy | 3,600.00 | Reiterated |
| Michael Morris | Guggenheim | Buy | 3,000.00 | Maintained |
| Andrew Boone | JMP Securities | Buy | 3,300.00 | Reiterated |
| Unknown Analyst | CFRA | Buy | 3,400.00 | Upgraded |
| Christophe Cherblanc | Societe Generale | Buy | 3,730.00 | Maintained |
| Ivan Feinseth | Tigress Financial | Buy | 3,540.00 | Reiterated |
| Jason Bazinet | Citigroup | Hold | 2,965.00 | Maintained |
| Maria Ripps | Canaccord Genuity | Buy | 3,350.00 | Maintained |
| Jason Helfstein | Oppenheimer | Buy | 3,500.00 | Maintained |
| Joseph Bonner | Argus Research | Buy | 3,100.00 | Maintained |
| Ella Ji | China Renaissance Securities | Buy | 3,368.00 | Maintained |
| Unknown Analyst | KGI Securities | Buy | 3,000.00 | Initiated |
| Michael Nathanson | MoffettNathanson | Buy | 2,800.00 | Maintained |
| Rob Sanderson | Loop Capital Markets | Buy | 2,525.00 | Upgraded |
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?
Analysts’ Recent Actions for Alphabet Stock
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
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
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
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
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
Alphabet Dividend Payout Ratio vs Competitors
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
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
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
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
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
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
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.
Alphabet DCF – EBITDA Exit – Valuation & IRR
Alphabet DCF Assumptions
| Tax Rate | 16.2% |
| Discount Rate | 8.4% |
| Perpetual Growth Rate | 2% |
| EV/EBITDA Multiple | 12.5x |
| Transaction Date | 05/02/2022 |
| Fiscal Year-End | 31/12/2022 |
| Current Price | 2,865.86 |
| Shares Outstanding | 662 |
| Debt | 26,206 |
| Cash | 20,945 |
| Capex | 24,640 |
Alphabet Cash Flow Forecast
Alphabet Terminal Value – EBITDA Exit
| Final Forecast EBITDA | 196,262 |
| EV/EBITDA Multiple | 12.5x |
| TERMINAL VALUE | 2,453,270 |
Alphabet Intrinsic Value – EBITDA Exit
| Enterprise Value | 1,986,779 |
| Plus: Cash | 20,945 |
| Less: Debt | 26,206 |
| Equity Value | 1,981,518 |
| EQUITY VALUE / SHARE | 2,992.69 |
Alphabet 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 Value | 2,865.86 |
| Upside | 126.83 |
| Intrinsic Value | 2,992.69 |
Alphabet Investment -Internal Rate of Return (IRR)
| Target Price Upside | 4.4% |
| Internal Rate of Return (IRR) | 9.4% |
Alphabet Internal Rate of Return (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%.
Alphabet DCF – EBITDA Exit – Sensitivity Analysis
Variables’ Influence on Model
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
Bear Case Price = $2,488.88
Uplift vs Market Value = 13.2%
Bull Case Price = $3,536.40
Uplift vs Market Value = 23.4%
Bear Case Price = $2,637.36
Uplift vs Market Value = -8.0%
Bull Case Price = $3,399.20
Uplift vs Market Value = 18.6%
Alphabet DCF – Perpetual Growth Rate – Valuation & IRR
Alphabet Assumptions
| Tax Rate | 16.2% |
| Discount Rate | 8.4% |
| Perpetual Growth Rate | 2% |
| EV/EBITDA Multiple | 12.5x |
| Transaction Date | 05/02/2022 |
| Fiscal Year-End | 31/12/2022 |
| Current Price | 2,865.86 |
| Shares Outstanding | 662 |
| Debt | 26,206 |
| Cash | 20,945 |
| Capex | 24,640 |
Alphabet Cash Flow Forecast
Alphabet Terminal Value – Perpetual Growth
| Final Forecast FCFf | 119,494 |
| Perpetual Growth Rate | 2.0% |
| TERMINAL VALUE | 1,902,831 |
Alphabet Intrinsic Value – Perpetual Growth
| Enterprise Value | 1,616,256 |
| Plus: Cash | 20,945 |
| Less: Debt | 26,206 |
| Equity Value | 1,610,995 |
| EQUITY VALUE / SHARE | 2,433.09 |
Alphabet 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 Value | 2,865.86 |
| Upside | -432.77 |
| Intrinsic Value | 2,433.09 |
Alphabet – Internal Rate of Return (IRR)
| Target Price Upside | -15% |
| Internal Rate of Return (IRR) | 5% |
Alphabet Internal Rate of Return (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
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
Bear Case Price = $2,066.53
Uplift vs Market Value = -27.9%
Bull Case Price = $2,935.26
Uplift vs Market Value = 2.4%
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
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.