Alphabet (NASDAQ:GOOG GOOGL) stock is holding steady thanks to the announced Fitbit (NYSE:FIT) acquistion. Prior to this announcement, shares fell from their 52-week high of $1,299.31 to as low as $1250.84 per share due to an earnings miss on Oct. 28. But thanks to this potentially game-changing deal, shares are now just a few bucks shy of their high-water mark.
However, valuation-wise, GOOG stock is not exactly cheap. But compared to its FAANG peers, today’s stock price may be a solid entry point. While the company faces headwinds, Alphabet may have enough catalysts in the pipeline to get things moving.
Let’s take a closer look at GOOGL stock and see why it may be a buy today.
Recent Developments with Google Stock
As mentioned above, GOOG stock missed on earnings for the prior quarter. Diluted earnings per share for the quarter ending Sept. 30, 2019 was $10.12, below estimates of $12.71 per share. But revenue grew from $33.6 billion in third-quarter 2018 to $40.3 billion in Q3 2019. Advertising revenue soared from $28.9 billion to $34 billion. Operating income was $9.2 billion in Q3 2019, compared to $8.6 billion in the prior year’s quarter.
Material in the earnings miss was $1.5 billion in unrealized losses on equity investments. Increased operating losses for the “Other Bets” segment were another factor. This segment includes emerging businesses like self-driving vehicle startup Waymo.
Advertising makes up the majority of Alphabet’s revenue, but this cash cow may be under threat. Amazon (NASDAQ:AMZN) is gaining market share in search ad revenue. Amazon’s share of search advertising could grow to 15.9% by 2021, according to eMarketer. Google’s share could fall from 73.1% today to 70.5% in 2021.
This puts pressure on Google stock. The company’s high-margin ad business clearly faces competitive headwinds. New frontiers are necessary to keep the needle moving. One area of future growth is Cloud Computing, where Google already generates $8 billion a year in revenue. The company plans to triple its cloud sales force in order to drive additional growth.
Amazon’s AWS and Microsoft’s (NASDAQ:MSFT) Azure still lead the cloud pack. But with Google’s cash and resources, the company could make serious inroads. The Fitbit buy is another strong catalyst for GOOGL stock. With Fitbit, the company can go head-to-head with Apple (NASDAQ:AAPL) in the fast-growing “wearables” business.
But is all of this priced into Google stock? Let’s take a closer look at valuation.
GOOG Stock Is Fairly Priced for a FAANG
Alphabet (Google) is one of the 5 “FAANG” stocks. FAANG stands for Facebook (NASDAQ:FB), Amazon, Apple, Netflix (NASDAQ:NFLX), and Google. GOOGL stock is not the cheapest of the FAANG names. But compared to Amazon and Netflix, shares trade at a fair valuation.
GOOG stock currently trades at a forward price-earnings (PE) ratio of 27.9, and its enterprise value/EBITDA (EV/EBITDA) ratio is 17.8. Here are the valuation metrics for the rest of FAANG:
- Facebook: Forward PE of 30.7, EV/EBITDA of 18
- Amazon: Forward PE of 87.7, EV/EBITDA of 27
- Apple: Forward PE of 19.8, EV/EBITDA of 15
- Netflix: Forward PE of 85.3, EV/EBITDA of 55
This means Google stock is more expensive than Apple, about the same valuation as Facebook, and a bargain compared to Amazon and Netflix. The premium to Apple is justified. Apple is no longer a fast-growing company. Facebook is projected to grow on par with GOOG stock (about 21.8%).
Amazon’s premium valuation may not be justified, given analysts estimate revenue to grow from $279.1 billion in 2019 to $330.55 billion in 2020 (18.4% growth). Netflix continues to be priced for perfection and is not a strong comp for Google stock.
But does this make GOOG stock a value play? I wouldn’t go that far. Alphabet’s valuation is appropriate given its growth projections. But the company does face issues as the ad business is eroded by competition. Google has the money, talent, and resources to take on new markets. The question is, how long will it take for these new catalysts (cloud, Fitbit, “other bets”) to move the needle?
Bottom Line: GOOGL Stock Is Worth a Look
Google stock is no deep value stock, but relative to other growth names, shares are fairly priced. The company continues to be a cash cow thanks to search advertising. Combined with potential catalysts like the cloud and wearables, the company could continue to drive substantial growth.
But competition from Amazon, Microsoft, and others remains a concern. Long term, GOOGL stock may be a buy. But don’t be surprised if a few short-term stumbles happen along the way.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.