Earlier this month, we asked if investors should buy Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) when it was above $1,000 per share. The short answer? No. It was best to wait on pulling the trigger for GOOGL stock. Friday proved that more than anything, with shares puking 3.4%. My reasoning was and still is simple: GOOGL stock was overbought.
I realize these opening lines are not the lines that bulls want to see. That’s fair, but it’s also the truth. I’ll get to the stock price more in a bit, but for now let’s look at the business and valuation.
Of course, it doesn’t help that there is now some chatter about a bubble. Specifically, this is in regards to large-cap tech like Alphabet, Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT) and Facebook (NASDAQ:FB). Not unlike what happened to Nvidia Corporation (NASDAQ:NVDA), which is now plunging from its all-time highs, (here’s why).
Alphabet Inc: Fundamentals and Valuation Matter
The valuation for GOOGL stock is a bit tricky. Because Alphabet Inc is now reporting in GAAP (instead of non-GAAP), it makes this year’s number appear low. For instance, in the latest quarter, Alphabet’s earnings of $7.73 would appear to be just 23 cents above last year’s result. But in 2016, the company was still reporting non-GAAP earnings per share. On a net income basis — how much the company actually makes or loses — the figure actually grew a whopping 28.9% to $5.43 billion.
Analysts now expect GOOGL to earn $33.95 per share this year. Despite what it looks like, this is not a decline from last year’s $34.34 figure.
So looking forward, analysts expect 19.4% revenue growth this year and a whopping 16.2% growth in 2018. On the earnings front, expectations (for GAAP) call for growth of 19.4% in 2018 and 18.8% growth annually for the next five years. Although 24.5x forward estimates isn’t exactly cheap, it’s a far cry from vastly overvalued. Particularly when considering Alphabet’s assets like Google and YouTube. And especially considering its growth estimates.
It’s safe to say that CFO Ruth Porat, who came on board in May 2015, has done a stellar job. Previously, Alphabet Inc didn’t provide the Street with the transparency it so-desperately craved. As a result, earnings and revenue results were erratic and usually came in a wide margin off of expectations.
But transparency is better with Porat in the C-suite, as is the business. While Porat may have cut costs, she didn’t limit future growth. For instance, one analyst recently said Alphabet’s self-driving car unit, Waymo, is worth $70 billion.