Investor sentiment on Wall Street has been inconsistent for months. This is the byproduct of having a never-ending season of headline trading. Usually this causes a ruckus among investors. However, some investments, like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), are holding up better than others. While this is a testament to the skills of its management team, it also presents a few concerns with regards to GOOGL stock.
First let’s get the obvious out of the way: If markets are higher in the future, then GOOGL will also be higher.
The company is a cash cow on so many levels. It has a global reach with multi-billion user platforms. Very few companies can compete with it since it has become a behemoth.
In fact, at one point, Google controlled most of search. It has since divested a bit from that, but nevertheless the opportunity is still great.
Its financials are beyond reproach without being outrageous. Because management is delivering strong growth, the financial metrics are still in line. That’s because performance has kept up with stock appreciation.
With all of that in mind, here’s a closer look at what to expect from GOOGL stock moving forward.
GOOGL Stock Has Support
At these levels, I do have short-term concerns about the price action. If the stock market corrects into Christmas, it will drag down all stocks with it. Google will not be an exception and it will retest its footing at support levels.
Luckily, those are nearby and starting just below its current price. There are several support levels below that like the one at $2,620 per share. That was the September correction low most recently.
In reality, even if the stock falls another 10% from there, the bulls would still be in control of it. Just remember that GOOGL stock was only $1,600 per share in the summer of 2020. At the close of yesterday it was still 80% above that.
Losing some steam would be part of normal price action. These are strange conditions that we have on Wall Street. It’s likely the byproduct of having so much stimulus in the system in the last 2 years. The government quite frankly went nuts with the trillions of reflation efforts.
This will be a giant nightmare for generations to come, but for now it keeps the stock market afloat. All these trillions of dollars have to land somewhere in this economy. The White House and the Federal Reserve went all out, leaving nothing in the reserves.
There Are Extrinsic Risks
Inflation fears are rising concerns about the “transitory” Fed’s stance. And the Omicron mutation of the Covid-19 virus raises lock down threats. While the second is a health concern, inflation is not an economic worry yet. Yes, everything is more expensive than ever now but it’s not stopping people from spending. Furthermore, jobs reports indicate that almost everyone that wants a job has one.
These are idyllic conditions for continued growth in company profit-and-loss statements. Even at these altitudes, Google stock is not outrageously expensive. It has a price-to-sales ratio under 9x and a price-to-earnings ratio of 28x. This is well in line with the benchmarks of growth companies.
To summarize, I’d like to invoke a cliché: I am “cautiously optimistic” about GOOGL stock. There just isn’t a better way of describing it.
I have no company specific concerns, but I do have extrinsic worries. The price action has simply been too strong to continue unscathed this strong for this long. Yesterday, the Federal Reserve Chair Jerome Powell sounded hawkish. It was unusual for him to speak against his official Fed policy from a few weeks ago. It will be interesting to see how they follow up with the tone in their next meeting.
Investors can stay long GOOGL stock. but I would be one to book profits or sell some covered calls. New entrants should consider only taking partial positions. The options markets offer smart ways of going long GOOGL, while leaving room for error.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.
