Alphabet Is Down, But Its Price Target Is Still Reasonable

  • Alphabet (GOOG, GOOGL) CEO Sundar Pichai recently said it faces several challenges in 2022 related to the global economy.  
  • Wall Street currently has an average target price of $3,296.58, 48% higher than current prices.
  • GOOG stock can meet this target but buy for the long haul.
Alphabet Inc. (GOOG, GOOGL) and Google logos seen displayed on a smartphone

Source: IgorGolovniov / Shutterstock.com

Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) CEO Sundar Pichai’s recent comments about the weakening global economy weren’t unique. But they do suggest the company will have to work a little harder for GOOG stock to hit Wall Street’s target price.

Despite its first-quarter 2022 results missing on both the top and bottom lines in the first quarter, Alphabet has plenty of irons in the fire. These should provide it with the catalysts it needs to meet analysts’ consensus estimate within the next 12 months.   

In particular, I believe two specific reasons should help it meet this target. I believe Alphabet is one of, if not the, safest FAANG stocks to own at a time when investors face intense volatility.  

GOOG Alphabet $2,218.37
GOOGL Alphabet $2,209.26

Down 20%, GOOG Stock Is Relatively Cheap

There is no question Alphabet’s miss on its first-quarter earnings — it earned $24.62 per share versus the analyst estimate of $25.91 — was a wake-up call to investors that earnings do matter, as does the price you pay for a stock.

FAANG stock valuations are now fundamental to investors. If you miss the street’s estimates, you will get punished. GOOG stock is down 23% since its April 4 high of $2,880.88. 

According to Yahoo Finance, the analysts’ revenue estimate for 2022 is $299.01 billion. Based on this, investors are valuing Alphabet at 5x sales. That’s below its five-year average of 6.7x sales. From a price-to-sales perspective, GOOG stock hasn’t had this low a multiple since 2014. 

Its relatively cheap valuation applies to every major financial metric. Based on a $111.61 earnings per share estimate for 2022, it’s trading at 20.7x 2022 earnings. It hasn’t had a P/E ratio this low over the past decade. 

I’m a big believer in free cash flow generation. Alphabet’s one of the best in this department. In the first quarter, despite capital expenditures of almost $10 billion that were 65% higher than Q1 2021, it generated a free cash flow of $15.32 billion. That’s nearly $2 billion higher than last year. 

Google Cloud Continues to Grow

Google Cloud’s revenue was $5.82 billion in the first quarter, 44% higher than a year earlier. It accounted for 8.6% of its total revenue. That’s 130 basis points better than a year ago. Sequentially, it grew cloud revenues by 5.1%

If it keeps gaining 130 basis points each quarter year-over-year, Google Cloud should account for more than 10% of its overall revenue by the end of 2022. 

I’m a glass-half-full person when it comes to investing. So, I believe the opportunity for Google Cloud to account for 20% or more of Alphabet’s overall revenue is a big plus if you own or are considering buying its stock.

The biggest negative for investors is that Google Cloud continues to lose money. In the first quarter, it lost $931 million. However, that was down from a $974 million loss a year earlier. In other words, Google Cloud lost 24 cents for every sales dollar in Q1 2021. The loss was 8 cents per dollar of sales in the latest quarter, a 33% improvement. 

On page 11 of its Q1 2022 10-Q, Alphabet noted Google Cloud had approximately $51 billion in revenue backlog. Half the revenue is to be recognized over the next 24 months, with the rest thereafter. 

Size and scale will translate into a profitable Google Cloud from where I sit. 

Investing in the Business of GOOG Stock

The best time to go on offense is when everyone else is playing defense. In a period of great uncertainty, Alphabet is using its tremendous cash flow generation to continue investing in its business. 

“We want to be resilient in moments like this. We are very excited about the opportunities ahead. And so we are investing. We are continuing to hire, bringing in great talent. There are areas where we are seeing a secular transformation, like cloud and the transformation to digital. So [we] are continuing to invest,” Pichai told CNBC in mid-May. 

If ever there was a stock to buy on the dip, Alphabet is undoubtedly it. 

On the date of publication, Will Ashworth 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.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


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