Google parent Alphabet Inc (GOOG, GOOGL) hasn’t been able to resist the market slump this year, but bulls know that the drawdown offers a chance to pick up more Google stock on weakness.
After all, much of the selloff isn’t a vote on Alphabet. GOOGL stock was bound to have a tough year after 2015’s amazing run. When it comes to equities, the higher they fly, the harder they fall.
In a year when the market was essentially flat, Google stock rose 45%. As one of the so-called FANG stocks — Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google — it was primed to become a source of funds in any market-wide selloff.
Cut to 2016 and Google is off more than 7% year-to-date. Naturally, this dynamic is evidenced proportionally in all the FANG stocks.
At about 30%, FB had the smallest return of these mega-names last year, and so it’s also the one that’s held up best this year. (FB stock is actually up a bit more than 1%.)
Netflix, 2015’s highest flier with a a gain of 129%, has given up more than 20% for the year-to-date. Amazon rose 119% last year and is so far off 18% in 2016.
This should be reassuring to investors in Alphabet, because it shows that at least part of the weakness in GOOGL is driven by broader market trends, not the company’s fundamentals.
Google Stock: A Bargain Valuation
And as for the fundamentals? They more than justify Alphabet’s share price. If anything, it’s a bargain.
Just look at the valuation. Google stock changes hands at not quite 18 times forward earnings. That represents almost no premium to it’s long-term per-annum growth forecast of 16.4%. That doesn’t make sense.
Heck, analysts expect Alphabet’s earnings per share to rise 17% this year alone. Meanwhile, the S&P 500 is projected to generate EPS growth of less than 4% in 2016, according to Yardeni Research.
It’s also significant that compared to the broader market, GOOGL shares are lagging in relation to their growth prospects. The price-earnings growth ratio stands at 1.29. Yardeni puts the S&P 500’s multiple closer to 1.7.
Alphabet’s relative valuation looks pretty attractive amid sluggish earnings growth in a lackluster market. Its main headwind is sentiment.
No, that may not change soon. Rest assured, however, that sentiment is cyclical. When investors once again feel good about equities, Google stock is priced to outperform.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
