I will traditionally start with the technical parameters of the stock price dynamics.
At the beginning of 2018, the actual price of Alphabet's (GOOG) (GOOGL) stock digressed from its long-term exponential trend (that always looks like a straight line on the graphs with log y-axis) by more than the one standard deviation. A similar situation was observed in all FAAMG companies. I then warned about correction and it happened. But now, the actual price of Alphabet almost coincides with the level of its long-term trend pointing to the balanced state. Judging by this trend, at the beginning of 2019, Alphabet's stock price will cross the mark of $1,250:
A bit more about the dynamics.
In January, Alphabet's stock price growth reached 50% YOY. Over the past eight years, this level was critical and always followed by the reduction in the rolling annual price return of Alphabet's stock. At the moment, this indicator stays around 20% which is close to the statistical average. This again points to a balanced state of the stock price dynamics.
Let's now turn to the multiples.
In Q1 2018, the financial results of Alphabet were affected by a new accounting standard (ASU 2016-01) that changes the way companies account for equity security investments. Therefore, in my opinion, analyzing Alphabet's multiples based on the net profit doesn't make sense now. Let's focus on the EBITDA.
Judging by the EV/EBITDA, Alphabet maintains the moderate growth potential compared to its key competitors in the digital advertising market:
We reveal almost the same potential comparing Alphabet with companies on the FAAAMN list:
It is important to note that comparison of Alphabet with the FAAAMN companies through EV/EBITDA adjusted for the annual EBITDA growth points to the balanced state of Alphabet's capitalization:
Let's now look at the P/S multiple calculated based on the revenues expected in 2019 and adjusted for the expected revenue growth rate. Let me remind you that the P/E is not worth paying attention to.
So, in comparison with the key competitors, the P/S (forward) to growth multiple indicates that Alphabet is slightly overpriced:
At the same time, in comparison with the FAAAMN list, Alphabet is undervalued:
And finally, in comparison with a broad sample of companies, Alphabet is substantially undervalued:
As you can see, judging by the comparative analysis of the key multiples, Alphabet is not as clearly undervalued as, for example, Facebook (FB). However, it is clearly not overvalued as well. Alphabet is balanced from this perspective.
Let's continue the analysis of Alphabet's multiples in the context of the company's internal growth rates.
In the last quarter, the revenue (ttm) of Alphabet increased by 23.73% YoY, which was the record growth rate from the year 2012. Except for the Q2 2017, Alphabet's revenue has been growing with continuous acceleration for three years now.
At that, analyzing Alphabet's revenue figures on the graph with a logarithmic y-axis (and this is the most convenient way to analyze exponential processes), we see that, in fact, only in the last quarter the growth dynamics of Alphabet's revenue caught up with its long-term exponential trend that involves reaching $160 billion by the end of this year:
Speaking of the revenue, it should also be noted that the current level of Alphabet's capitalization, reflected by the EV/Revenue, is balanced with the current pace of the revenue (ttm) growth:
We reveal the same condition analyzing the interdependence between the growth rate of Alphabet's EBITDA and the value of the EV/EBITDA over the past four years:
Putting It All Together
In this article, I had to use the word "balanced" five times because this adjective most accurately describes the current value of Alphabet. The company is growing in full accordance with its trend. And judging by this trend, Alphabet's stock will exceed the mark of $1,250 by the beginning of the next year.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.