GOOG Stock Study (1-17-23)

I recently did a stock study on Alphabet, Inc. (GOOG) with a closing price of $92.80.

This mega-sized (revenue > $50B) company has grown sales and EPS at annualized rates of 19.2% and 13.2% per year for the last decade. Revenue is up and straight despite 2013 earnings not showing growth until 2018 and beyond. Excluding 2021 (upside outlier), PTPM averages 25.2% for the last five years and is steady over the last 10. This trails peer (stated as META, TCEHY, and SPOT) and industry averages.

Over the last five years, ROE averages 18.4% and is higher than peer and industry averages. Debt-to-capital, under 11% for the last decade, averages 6.6% for the last five years. This is lower than peer and industry averages. Should anyone be concerned about the debt load, interest coverage is a ridiculous 205.6.

M* writes:

     > Alphabet is a holding company. Internet media giant Google is a wholly owned
     > subsidiary. Google generates 99% of Alphabet revenue, of which more than 85%
     > is from online ads. Google’s other revenue is from sales of apps and content
     > on Google Play and YouTube, as well as cloud service fees and other licensing
     > revenue. Sales of hardware such as Chromebooks, the Pixel smartphone, and
     > smart home products, which include Nest and Google Home, also contribute to
     > other revenue. Alphabet’s moonshot investments are in its other bets segment,
     > where it bets on technology to enhance health (Verily), faster internet
     > access to homes (Google Fiber), self-driving cars (Waymo), and more.

I assume long-term annualized sales growth of 7% based on the following:

• CNN Business projects growth of 10% YOY and 9% per year for ’22 and ’21-’23, respectively (based on 43 analysts).
• YF projects YOY growth of 10% and 8% for ’22 and ’23, respectively (31 analysts).
• Zacks projects YOY growth of 10.3% and 7.1% for ’22 and ’23, respectively (9).
• CFRA projects annualized growth of 8.7% and 9.5% for ’21-’23 and ’21-’24, respectively.
• Value Line projects 14% annualized growth from ’21-’26.
• M* offers a 2-year ACE estimate of 6.8% per year.

I assume long-term annualized EPS growth of 6% based on the following:

• CNN Business projects 15.9% YOY contraction and 3.9% contraction per year for ’22 and ’21-’23, respectively (based on 43 analysts).
• MarketWatch projects 2.3% contraction per year and 3.7% growth per year for ’21-’23 and ’21-’24, respectively (48 analysts).
• Nasdaq.com projects annualized growth of 11.8% and 17.6% for ’22-’24 and ’22-’25, respectively (12, 8, and 3 analysts for ’22, ’24, and ’25).
• YF projects 16% YOY contraction for ’22, 10.4% YOY growth for ’23, and 8.9% annualized growth for the next five years (35).
• Zacks projects 16.6% YOY contraction for ’22, 8.1% YOY growth for ’23, and 11.3% annualized growth for the next five years (12).
• Value Line projects 12.7% growth per year from ’21-’26.
• M* has long-term ACE at 13% annualized.
• CFRA projects 3-year annualized EPS growth of 5%.

I project a future High P/E of 27. High P/E has ranged from 29.2 (’18) to 59.9 (upside outlier in ’17) since ’14 with a last-5-year average of 28.9 (excluding the outlier). The trend is down, however.

I project a future Low P/E of 14. Low P/E has ranged from 15.1 (’21) to 42.9 (upside outlier in ’17). Excluding the outlier, the last-5-year average is 18.8. The trend is down.

The projected low price based on these inputs is $70.60, which is about 23% below the previous closing price.

All this results in an U/D ratio of 4, which puts GOOG in the Buy zone down to $98. CAR (using forecast High P/E) is 14.4% and PAR (using forecast average P/E) is 8.3%. I’d like to see PAR higher, but my interpretation also depends on the margin of safety (MOS) built into the study.

To assess MOS, I look at Member Sentiment (MS). 851 studies over the past 90 days indicate projected sales growth, projected EPS growth, and forecast High P/E averages of 11.9%, 13.1%, and 26.9, respectively. My revenue and EPS growth estimates are significantly lower and my High P/E is about the same (27).

I have two issues with this set of MS data. First, no average forecast Low P/E is available. As I scan through the data, I see 12 unreasonable entries in this field including one “NMF.” I wonder if this non-numeric is responsible for why an average could not be calculated. Second, the average low price among these studies is 217 due to some 4-digit values. Being higher than the previous closing price, this would be invalid average. At first I thought people might have used pre-split stock prices, but GOOG stock split more than three months before (Jul 202) the 90-day window begins. Some other explanation must exist.

Regardless of the questionable data, I believe this stock study contains a healthy MOS. Both growth estimates are significantly lower than MS in addition to being lower than every long-term analyst estimate except CFRA (5% EPS growth). Furthermore, Value Line projects a long-term average P/E of 25 compared to my 20.5.

Although the PAR is suboptimal, the MOS gives me confidence in Alphabet’s chances of beating these estimates and realizing stock appreciation more consistent with the forecast High P/E.