Shares of Alphabet (NASDAQ:GOOGL, NASDAQ:GOOGL) have quietly stagnated for the past 15 months. Google stock is about flat during that time and is up just 7.2% since mid- January 2018. That’s not what many investors would expect from a tech giant with solid growth.
That’s particularly true since the PowerShares QQQ ETF (NASDAQ:QQQ) is up about 8.2% since January 2018 and has surged 15.5% over the past 15 months. For long-term investors, though, not all is lost. Long rests allow stocks to consolidate, increasing the odds of a larger rally once they break free. Further, continued growth alongside muted stock prices allows valuations to become more attractive.
Let’s explore Google stock more closely.
Growth and Valuation
Analysts’ average estimate calls for Google’s revenue to grow almost 19% this year to $162.5 billion. The average top-line estimate for 2020 currently sits at $191.1 billion, implying 17.6% growth.
On the earnings front, analysts, on average, expect 11.4% growth to $48.68 per share. Based on that estimate, Google stock trades at 25.4 times this year’s EPS. For 2020, the consensus view calls for EPS growth to increase to 14.5% as analysts expect EPS of $55.74.
Google stock is a blue-chip name. Not necessarily as blue chip as the likes of McDonald’s (NYSE:MCD) or Procter & Gamble (NYSE:PG). But blue chip in the sense that it is a best-in-breed, dependable giant.
The market cap of GOOG stock is $860 billion. That’s not the highest market cap in tech — Google stock trails Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) in that department — but GOOG has established itself as a giant.
Now consider that MCD stock trades at 25 times its earnings, and its revenue and earnings are expected to be nearly flat this year. PG also trades at 25 times its earnings, although its revenue and earnings are forecast to grow 3.6% and 7.7%, respectively in 2019.
Both MCD and PG also have dividends. But for 25 times earnings, would you rather own shares of a company with:
- 0.3% revenue growth, 0.6% earnings growth and a 2.5% dividend yield.
- 3.6% revenue growth, 7.7% earnings growth and a 2.45% dividend yield.
- 18.8% revenue growth, 11.4% earnings growth and no dividend.
I’m not saying there’s anything wrong with PG and MCD necessarily. But the valuation of GOOGL stock is reasonably attractive.
Balance Sheet and Financials
When examining companies, investors must look beyond EPS and sales growth. For instance, MCD and PG are dividend aristocrats. They have not only paid but raised their dividends every year for decades on end. That’s worth a premium, in my opinion.
Google stock deserves a premium because of its balance sheet.
For Q2, Alphabet reported cash and short-term investments of $121 billion. That was up more than 18% year-over-year and, perhaps more impressively, it was up 6.7% versus Q1.
The value of its total assets rose 21.5% year-over-year, weighing in at an astounding $257.1 billion. That’s way ahead of its total liabilities of just $64.9 billion. GOOGL carries about $4 billion of long-term debt. Put in a more understandable way, an individual in a similar financial position would have $121,000 in the bank and $4,000 in debt.
Additionally, Alphabet has trailing annual free cash flow of more than $27 billion. And even as its gross margins continue to tick lower — they were nearly 56% in the 12-months that ended in June — its operating margins continue to tick higher. They came in at 23.4% for the 12 months that ended in June.
Alphabet is a cash-generating machine, so Google stock is well worth a premium.
Trading Google Stock
Click to Enlarge
As I mentioned earlier, Alphabet stock price has been building a rather large base. Above is a five-year chart of GOOGL stock, showing how it rallied hard for years. After bumping its head against resistance at $1,000 in mid-2017, Google stock eventually pushed through that level. That area became support by the end of 2017.
However, those rally days have since ended, with Alphabet stock price stuck between $1,000 and $1,300. Over the last few months, Alphabet stock price has been in rally mode, but it’s nearing long-term resistance ahead of the company’s earnings.
A strong report, followed by a decline of Alphabet stock price to the $1,000 area amid a broad-market selloff, would provide investors with a great opportunity to buy the shares.
But patient investors should wait for GOOGL stock to break above its resistance, launching Alphabet stock price higher. That might happen this month or in 2020. But until then, I’m a long-term buyer near the stock’s support.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long GOOGL and AAPL.
