Image: Our fair value estimate of Alphabet has continued to lead the stock higher, and shares continued to deliver following the company’s third-quarter report, released October 28.
By Brian Nelson, CFA
Our long-term thesis and the top weighting of Google parent company, Alphabet (GOOG) (GOOGL) in the Best Ideas Newsletter portfolio is unchanged following the company’s fantastic third-quarter report, released October 28. During the period, revenue advanced 41% on a year-over-year basis as the company’s operating margin swelled ~8 percentage points to drive diluted earnings per share to $27.99, beating consensus by nice margin. We’re reiterating our $3,500 fair value estimate for shares.
Here is what Sundar Pichai, CEO of Alphabet and Google had to say in the press release:
Five years ago, I laid out our vision to become an AI-first company. This quarter’s results show how our investments there are enabling us to build more helpful products for people and our partners. Ongoing improvements to Search, and the new Pixel 6, are great examples. And as the digital transformation and shift to hybrid work continue, our Cloud services are helping organizations collaborate and stay secure.
Our long-term thesis on Alphabet, and Google more specifically, is that paid search advertising is the secular growth trend that will keep on giving. Google has become entrenched in our daily lives, and the company is making a mint as advertisers pay handsomely for search rankings and other features. The company’s YouTube ad growth is also impressive, with that area growing an impressive 43% in the quarter on a year-over-year basis. Alphabet is delivering in-line with our above-market expectations, and we love it!
Alphabet generated $66.7 billion in cash flow from operations during the first nine months of the year against a capital spending profile of $18.3 billion, translating into traditional free cash flow of $48.46 billion, an absolutely huge number, and one that is greater than cash flow from operations, alone, during the same period a year ago. Cash and marketable securities stood at $142 billion at the end of September, against a long-term debt load of just ~$14.3 billion, revealing an enormous net cash position.
Concluding Thoughts
Alphabet registered a 10 on the Valuentum Buying Index in January 2019 at just below $1,100 per share. Shares have launched to nearly $3,000 since then, and we continue to expect strong performance given the company’s tremendous free cash flow generation, huge net cash position, secular growth prospects in search advertising, and above-market fair value estimate that stands at ~$3,500. We like shares of this top-weighted position in the Best Ideas Newsletter portfolio.
Alphabet’s 16-page Stock Report (pdf) >>
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Image Source: Value Trap
Tickerized for holdings in the SOCL.
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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.