Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) had the unfortunate timing of reporting earnings at the cusp of the market selloff. The end result has been a real doozy for GOOGL stock.
Shares are off roughly 20% from all-time highs, leaving investors wondering two things: Is now the time to bail or time to buy in?
Before we get to GOOGL stock, I want to say one thing about these types of selloffs. It’s not hard to tell when the market is starting to get shaky. I mean, heck we were almost down 5% in one day! So when the sledding gets, do yourself a favor and make a watch list.
And no, not just a watchlist via your broker. An old-fashioned pen-and-paper watch list. Pull up some charts or head to Investorplace.com; do whatever it is that you do to determine what you’re willing to pay for a stock.
Write these prices down. Mine looks like Bank of America Corp (NYSE:BAC) at $28, Nvidia Corporation (NASDAQ:NVDA) at $200 and Alphabet stock at $1,030-ish.
There are more but you get the gist. The point isn’t to perfectly time the stock market. It’s to use a market-wide correction to buy stocks of good companies at prices that you feel are fair.
It subs emotion out of the game and puts logic on the court. This is about investing in companies, not gambling on stocks.
So why do we like Alphabet stock at $1,000? Although GOOGL stock only briefly touched $1,198 in late-January, the decline down to $1,000 marks a ~20% decline.
That’s a big drop for a high-quality company! It’s the stock’s lowest price since October, but after its big run, today’s prices feel like a bargain.
Facebook Inc (NASDAQ:FB) hasn’t been holding up too well either, now down to its 200-day moving average. After holding up well, Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX) are also starting to crack. None are down as much as GOOGL though.
Valuing GOOGL Stock
So why buy the “loser” in the group? Because Alphabet has a tremendous business. Analysts are looking for sales to grow 20.7% this year and 17% next year. Further, analysts are calling for 28% earnings growth in 2018 followed by 17% growth in 2019.
These are impressive numbers for a company sporting a $700 billion valuation. But despite the lofty value of GOOGL stock, Alphabet doesn’t have a staggering valuation. Shares trade at 24 times this year’s earnings and about 20 times 2019 estimates.
Some may call that a rich valuation. But with 20% sales growth and +25% earnings growth, it seems more like a bargain to me.
When you think of Alphabet’s businesses, it’s hard to say they don’t deserve a premium. Google search, the Waymo self-driving program that has been valued at $70 billion by some analysts, YouTube and Android are just some. These are high-quality businesses with a very solid moat.
I guess one could argue that Apple Inc. (NASDAQ:AAPL) and its iOS are better than Android, that Waymo isn’t the best self-driving car play and that Amazon will steal share from Google’s ad business.
But at the end of the day, Alphabet is a cash-cow. Business remains strong (evident by the growth) and the valuation is reasonable, unlike, say, stocks such as AMZN or NFLX.
Further, cash flows continue to be strong and management is dependable, particularly with CFO Ruth Porat in the C-suite.
Trading GOOGL Stock
In January, Alphabet stock went a bit parabolic. Shares jumped from $1,040 to $1,200 on nothing, running higher into earnings. It’s now given up all of that move and then some.
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On my list, I have $1,030 written down for GOOGL stock. That’s where trend-line support came into play (black line). That’s also where, despite being drawn near $1,000, is where support No. 1 came into play (purple line).
Now sitting right on the 200-day moving average, will GOOGL stock bounce?
It likely depends on the overall market. This area should give some relief to the stock. If not, it could open the door to $925. It’s not healthy to see GOOGL fall below trend-support so quickly. Long-term investors can initiate a position here if they feel comfortable.
The plan would be to add again on a decline to $925. Remember, we are not talking about full positions, just starter positions.
Also keep in mind that GOOGL stock is already 20% off the highs.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
