Buy Alphabet Now Before Everyone Else Does
Summary
- One of the strongest bull markets in history has been driven by mega-cap tech, which as a group is 67% historically overvalued.
- But it's always and forever a market of stocks, not a stock market and even hyper-growth blue-chips are still reasonably to attractively valued if you know where to look.
- Even after a 67% rally in 2021, GOOG remains a classic Buffett-style "wonderful company at a fair price". One that offers 19% long-term return potential.
- No matter what happens in 2022, the world's best blue-chips stand ready to help you achieve your long-term financial goals.
- When you focus on safety and quality first, and prudent valuation and sound risk management always, a comfortable or even rich retirement isn't a matter of luck, just time and patience.
- This idea was discussed in more depth with members of my private investing community, The Dividend Kings. Learn More »
400tmax/iStock Unreleased via Getty Images
Growth stocks have been the main drivers of the incredible bull market we've seen since 2009.
(Source: Michael Batnick)
And 2021 has been no different.
In fact, 35% of this year's 30% gains are purely from five companies, the mega-cap tech giants.
The good news is that most of the bull market of the last 12 years has been justified. The top 10 S&P companies are 26% of the market and 31% of earnings.
The bad news? The top 10 S&P companies are trading at 32.4X earnings, a 63% historical premium.
For context, the biggest bubble in US history saw the market reach a 50% historical premium on March 24th, 2000. From which investors suffered through a lost decade for stocks.
Guess what some leading analysts are now expecting for the 2020s? Another lost decade for US equities.
I suppose we can take solace that most analysts expect modest 3% to 4% gains from the S&P 500, though big tech might suffer flat returns according to Vanguard.
| Year | Upside Potential By End of That Year | Consensus CAGR Return Potential By End of That Year | Probability-Weighted Return (Annualized) | Inflation And Risk-Adjusted Expected Returns |
| 2026 | 20.04% | 3.72% | 2.79% | 0.09% |
(Source: DK S&P 500 Valuation And Total Return Tool)
So, does that mean that the FANMAG complex is a minefield that investors shouldn't touch with a 10-foot pole for the next decade? Actually no.
Even Alphabet (NASDAQ:GOOG), (NASDAQ:GOOGL), which was up 67% in 2021, is a potentially reasonable hyper-growth blue-chip that you can safely buy even with the market near record highs.
Actually, GOOG's amazing 2021 rally is 100% justified by some of the fastest growth of any company on earth.
| Metric | 2020 Growth | 2021 Growth Consensus | 2022 Growth Consensus | 2023 Growth Consensus | 2024 Consensus | 2025 Consensus | 2026 Consensus |
| Sales | 15% | 41% | 17% | 15% | 14% | 16% | 12% |
| EPS | 19% | 85% | 5% | 13% | 21% | 23% | 23% |
| Operating Cash Flow | 21% | 49% | 16% | 14% | 25% | 14% | 13% |
| Free Cash Flow | 41% | 63% | 16% | 14% | 19% | 16% | 15% |
| EBITDA | 18% | 97% | 13% | 14% | NA | NA | NA |
| EBIT (operating income) | 18% | 92% | 12% | 15% | NA | NA | NA |
(Source: FAST Graphs, FactSet Research)
In fact, there are three reasons why Alphabet is one of the Dividend Kings' highest conviction recommendations for 2022 and beyond.
It's far better to buy a wonderful company at a fair price, than a fair company at a wonderful price." - Warren Buffett
So, let me walk you through the three reasons why I've been buying Alphabet hand over fist during the recent market dip, and why it might be just what your diversified and prudently risk-managed portfolio is looking for in the new year.
In fact, GOOG today is a classic Buffett-style "wonderful company at a fair price".
So, join me as we carefully analyze Alphabet's quality, growth prospects, risk profile, and valuation.
And I think you agree that there is one conclusion prudent investors can draw... buy Alphabet now before everyone else does.
Reason One: One Of The Highest Quality Blue-Chips On Earth
The Dividend Kings' overall quality scores are based on a 228-point model that includes:
dividend safety
balance sheet strength
credit ratings
credit default swap medium-term bankruptcy risk data
short and long-term bankruptcy risk
accounting and corporate fraud risk
profitability and business model
growth consensus estimates
cost of capital
long-term risk-management scores from MSCI, Morningstar, FactSet, S&P, Reuters/Refinitiv and Just Capital
management quality
dividend friendly corporate culture/income dependability
long-term total returns (a Ben Graham sign of quality)
analyst consensus long-term return potential
It actually includes over 1,000 metrics if you count everything factored in by 12 rating agencies we use to assess fundamental risk.
credit and risk management ratings make up 41% of the DK safety and quality model
dividend/balance sheet/risk ratings make up 82% of the DK safety and quality model
How do we know that our safety and quality model works well?
During the two worst recessions in 75 years, our safety model predicted 87% of blue-chip dividend cuts during the ultimate baptism by fire for any dividend safety model.
How does GOOG score on one of the world's most comprehensive and accurate safety models? Absolutely specularly.
Balance Sheet Safety
| Rating | Dividend Kings Safety Score (138 Point Safety Model) | Approximate Dividend Cut Risk (Average Recession) | Approximate Dividend Cut Risk In Pandemic Level Recession |
| 1 - unsafe | 0% to 20% | over 4% | 16+% |
| 2- below average | 21% to 40% | over 2% | 8% to 16% |
| 3 - average | 41% to 60% | 2% | 4% to 8% |
| 4 - safe | 61% to 80% | 1% | 2% to 4% |
| 5- very safe | 81% to 100% | 0.5% | 1% to 2% |
| GOOG | 100% | NA | NA |
| Risk Rating | Low Risk (70th percentile risk management consensus) | AA+ stable Outlook credit rating = 0.29% 30-year bankruptcy Risk | 20% Max Risk Cap Recommendation |
Long-Term Dependability
| Company | DK Long-Term Dependability Score | Interpretation | Points |
| Non-Dependable Companies | 21% or below | Poor Dependability | 1 |
| Low Dependability Companies | 22% to 60% | Below-Average Dependability | 2 |
| S&P 500/Industry Average | 61% (58% to 70% range) | Average Dependability | 3 |
| Above-Average | 71% to 80% | Very Dependable | 4 |
| Very Good | 81% or higher | Exceptional Dependability | 5 |
| GOOG | 82% | Exceptional Dependability | 5 |
Overall Quality
| GOOG | Final Score | Rating |
| Safety | 100% | 5/5 very safe |
| Business Model | 90% | 3/3 wide moat |
| Dependability | 82% | 5/5 exceptional |
| Total | 91% | 13/13 Ultra SWAN |
| Risk Rating | 3/3 Low Risk | |
| 20% or Less Max Risk Cap Rec | 5% Margin of Safety For A Potentially Good Buy |
GOOG: 26th Highest Quality Master List Company (Out of 508) = 95th Percentile
(Source: DK Safety & Quality Tool) updated daily, sorted by overall quality
The DK 500 Master List includes the world's highest quality companies including:
All dividend champions
All dividend aristocrats
All dividend kings
All 13/13 Ultra Swans (as close to perfect quality as exists on Wall Street)
- 44 of the world's best growth stocks (on its way to 50)
GOOG's 91% quality score means it's similar in quality to such blue-chips as
- Microsoft (MSFT)
- NextEra Energy (NEE) - dividend aristocrat
- Johnson & Johnson (JNJ) - dividend king
- T. Rowe Price (TROW) - dividend aristocrat
- Adobe (ADBE)
- Lowe's (LOW) - dividend king
Even among the world's highest quality companies, GOOG is of higher quality than 95% of them.
Why is GOOG one of the best companies you can own? First, Alphabet is one of the world's data kings with strong network effects. The more useful its services the more people use them. And the more data it collects, creating more useful services. A virtuous cycle of better service and a steadily wider moat.
- Cloud computing
- AI
- driverless cars
- advanced medicine (2 subsidiaries working on a cure for aging)
Earlier this year, we announced that we reached a significant milestone with Multitask Unified Model or MUM for short.
MUM is a thousand times more powerful than BERT and can understand information across many contexts, like text and images." - CEO, Q3 conference call
BERT is GOOG's former deep machine learning algo used to turn it into the world's dominant search engine. It now has an algo 1,000X as powerful.
On to cloud, where we see continued momentum with Q3 revenue growing 45% year-over-year." - CEO, Q3 conference call
GOOG has a lot of optionalities, possibly the most of any company on earth.
- buy it for the core advertising business
- and stay for the Moon shots and future dividends
This is key to GOOG's exceptionally strong long-term growth outlook that we'll talk about in section two.
But first, let's take a look at GOOG's incredible balance sheet.
GOOG Credit Ratings
| Rating Agency | Credit Rating | 30-Year Default/Bankruptcy Risk | Chance of Losing 100% Of Your Investment 1 In |
| S&P | AA+ stable | 0.29% | 344.8 |
| Moody's | Aa2 (AA equivalent) stable | 0.51% | 196.1 |
| Consensus | AA stable | 0.40% | 250.0 |
(Source: S&P, Moody's)
Rating agencies estimate a 1 in 250 chance that GOOG goes to zero in the next three decades.
There are no "risk-free" stocks, but GOOG is as close as you can get on Wall Street.
GOOG Leverage Consensus Forecast
| Year | Debt/EBITDA | Net Debt/EBITDA (3.0 Or Less Safe According To Credit Rating Agencies) | Interest Coverage (8+ Safe) |
| 2020 | 0.21 | -1.81 | 305.36 |
| 2021 | 0.14 | -1.25 | 73.49 |
| 2022 | 0.13 | -1.32 | 78.83 |
| 2023 | 0.11 | -1.48 | 86.23 |
| 2024 | 0.09 | -1.71 | NA |
| 2025 | 0.08 | -1.62 | NA |
| 2026 | 0.07 | -1.67 | NA |
| Annualized Change | -17.35% | -1.31% | -34.39% |
(Source: FactSet Research Terminal)
S&P considers GOOG's financial strength equal to that of the US treasury and here's why.
It has a massive net cash balance sheet that keeps getting stronger with each passing quarter.
GOOG Balance Sheet Consensus Forecast
| Year | Total Debt (Millions) | Cash | Net Debt (Millions) | EBITDA (Millions) | Operating Income (Millions) |
| 2020 | $13,932 | $26,465 | -$122,762 | $67,912 | $41,224 |
| 2021 | $14,788 | $38,542 | -$132,458 | $105,856 | $77,310 |
| 2022 | $15,038 | $94,849 | -$159,107 | $120,174 | $86,875 |
| 2023 | $15,767 | $139,724 | -$202,356 | $137,178 | $99,337 |
| 2024 | $14,110 | $201,870 | -$274,875 | $160,980 | $118,754 |
| 2025 | $13,932 | $347,449 | -$298,645 | $184,699 | $139,489 |
| 2026 | $13,932 | $460,712 | -$355,762 | $212,999 | $160,864 |
| Annualized Growth | 0.00% | 60.99% | 19.40% | 20.99% | 25.47% |
(Source: FactSet Research Terminal)
In fact, GOOG's cash position is growing at 61% per year and is expected to reach nearly half a trillion by 2026.
GOOG Bond Profile
(Source: FactSet Research Terminal)
GOOG has $146 billion in liquidity and bond investors, the "smart money" on Wall Street is so confident in its business model that they are willing to lend to it for 39 years at 2.75%.
- 1.1% average borrowing cost
- -2.3% long-term borrowing costs according to the bond market
The bond market loves GOOG so much, it's literally willing to pay it to borrow so it can invest in its business, or buy back stock.
Now, let's talk about Wall Street's favorite quality proxy, profitability.
GOOG Profitability: Wall Street's Favorite Quality Proxy
(Source: Gurufocus Premium)
Historical profitability in the top 10% of peers.
GOOG Trailing 12-Month Profitability Vs Peers
| Metric | Industry Percentile | Major Interactive Media Companies More Profitable Than GOOG (Out Of 587) |
| Operating Margin | 86.78 | 78 |
| Net Margin | 86.80 | 77 |
| Return On Equity | 89.29 | 63 |
| Return On Assets | 91.39 | 51 |
| Return On Capital | 66.95 | 194 |
| Average | 84.24 | 92 |
(Source: Gurufocus Premium)
And over the past year, certain profitability metrics are in the top 9% of peers.
GOOG Profit Margin Consensus Forecast
| Year | FCF Margin | EBITDA Margin | EBIT (Operating) Margin | Net Margin | Return On Capital Expansion | Return On Capital Forecast |
| 2020 | 23.1% | 36.6% | 22.2% | 21.7% | 1.06 | |
| 2021 | 27.8% | 41.7% | 30.4% | 28.7% | TTM ROC | 84.80% |
| 2022 | 26.8% | 40.5% | 29.3% | 25.7% | Latest ROC | 87.23% |
| 2023 | 26.5% | 40.2% | 29.1% | 25.2% | 2026 ROC | 89.61% |
| 2024 | 26.1% | 41.6% | 30.7% | 26.1% | 2026 ROC | 92.17% |
| 2025 | 25.4% | 41.3% | 31.2% | 27.0% | Average | 90.89% |
| 2026 | 24.9% | 42.6% | 32.2% | 27.8% | Industry Median | 16.97% |
| Annualized Growth | 1.29% | 2.55% | 6.36% | 4.20% | GOOG/Peers | 5.36 |
| Vs S&P | 6.99 |
(Source: FactSet Research Terminal)
- return on capital = annual pre-tax profit/all the money it takes to run the business
- Joel Greenblatt's gold standard proxy for quality and moatiness
GOOG's margins are steadily improving, and its return on capital is also rising to nearly 100% or 7X that of the S&P 500.
According to one of the greatest investors in history, GOOG is objectively one of the highest quality companies on earth.
And that profitability growth is despite impressive growth spending in its business.
GOOG Growth Spending Consensus Forecast
| Year | SG&A (Selling, General, Administrative) | R&D | Capex | Total Growth Spending | Sales | Growth Spending/Sales |
| 2020 | $28,998 | $27,573 | $22,281 | $78,852 | $185,527 | 42.50% |
| 2021 | $35,157 | $31,773 | $25,978 | $92,908 | $254,020 | 36.58% |
| 2022 | $41,346 | $37,456 | $29,393 | $108,195 | $296,712 | 36.46% |
| 2023 | $47,397 | $44,126 | $31,789 | $123,312 | $340,853 | 36.18% |
| 2024 | $50,016 | $47,645 | $32,846 | $130,507 | $386,909 | 33.73% |
| 2025 | $55,191 | $51,440 | $31,573 | $138,204 | $447,012 | 30.92% |
| 2026 | $60,468 | $55,854 | $32,980 | $149,302 | $500,209 | 29.85% |
| Annualized Growth | 13.03% | 12.49% | 6.75% | 11.23% | 17.98% | -5.72% |
(Source: FactSet Research Terminal)
Last year, GOOG spent almost $80 billion on growth and by 2026 that's expected to reach almost $150 billion.
- the US government is spending $100 billion per year on infrastructure
- which is the biggest infrastructure spending effort in over 50 years
- GOOG is spending more on growth than the US government
- and just about every government on earth
Speaking of infrastructure, what about Build Back Better and the potential for higher corporate taxes?
GOOG Tax Consensus Forecast
| Year | Pre-Tax Profit | Tax Costs | Tax Rate |
| 2020 | $48,082 | $7,813 | 16.25% |
| 2021 | $87,666 | $14,461 | 16.50% |
| 2022 | $91,523 | $15,444 | 16.87% |
| 2023 | $104,894 | $18,186 | 17.34% |
| 2024 | $122,277 | $21,820 | 17.84% |
| 2025 | $144,605 | $25,941 | 17.94% |
| 2026 | $167,632 | $32,256 | 19.24% |
| Annualized Growth | 23.14% | 26.66% | 2.86% |
Total Taxes 2020-2026 | $135,921 |
(Source: FactSet Research Terminal)
Assuming that passes in 2022, it likely wouldn't affect GOOG's tax bill much since GOOG is already paying more than the proposed 15% corporate minimum tax.
What about a 1% tax on buybacks? That would modestly affect GOOG since it's a buyback machine.
GOOG Buyback Potential Consensus Forecast
| Year | Dividend Consensus | FCF/share Consensus | Payout Ratio | Retained (Post-Dividend) Cash Flow | Buyback Potential | Debt Repayment Potential |
| 2021 | $0.00 | $107.47 | 0.0% | $71,468 | 3.79% | 483.3% |
| 2022 | $0.00 | $128.06 | 0.0% | $85,160 | 4.51% | 575.9% |
| 2023 | $0.00 | $154.42 | 0.0% | $102,689 | 5.44% | 682.9% |
| 2024 | $0.00 | $184.33 | 0.0% | $122,579 | 6.50% | 777.4% |
| 2025 | $0.00 | $213.33 | 0.0% | $141,864 | 7.52% | 1005.4% |
| 2026 | $0.00 | $244.75 | 0.0% | $162,759 | 8.63% | 1168.2% |
| Total 2021 Through 2026 | $0.00 | $1,032.36 | 0.0% | $686,519.40 | 36.39% | 4642.41% |
| Annualized Rate | NA | 17.89% | NA | 17.89% | 17.89% | 19.31% |
(Source: FactSet Research Terminal)
Almost $700 billion in consensus retained cash flow over the next five years is enough to pay off 47X their debt or buy back 36% of the stock.
Let that sink in for a minute. GOOG has the financial ability to buy back up to 4% of its stock every year.
| Year | Consensus Buybacks | % Of Shares |
| 2021 | $46,192.00 | 2.4% |
| 2022 | $41,043.00 | 2.2% |
| 2023 | $30,398.00 | 1.6% |
| 2024 | $60,401.00 | 3.2% |
| 2025 | $73,442.00 | 3.9% |
| 2026 | $82,452.00 | 4.4% |
| Total 2021 Through 2026 | $333,928.00 | 17.7% |
| Annualized Rate | 12.29% | -3.8% |
(Source: FactSet Research Terminal)
GOOG is expected to buy back $333 billion in stock, 18% of shares, and even then, cash is expected to hit nearly $500 billion by 2026.
- and $126 billion in free cash flow by 2026 (and growing quickly each year)
- GOOG's future dividend is mathematically inevitable if it grows as expected
| 3 Month Average Volume | Share Price | Daily Volume |
| 1,164,945 | $2,832.14 | $3,299,287,332.30 |
| Maximum Buyback Volumes | Share Price | Maximum Buyback Volumes |
| 116,494.5 | $2,832.14 | $329,928,733.23 |
| Annual Days Buybacks Permitted By Law | Maximum Buyback Volumes | Maximum Buyback Volumes |
| 204 | 2,376,4878 | $67,305,461,578.92 |
(Source: DK Research Terminal)
GOOG can't logistically buy more than about 2.4 million shares per year which are $67 billion per year at current valuations.
GOOG's buybacks are currently running about 75% of capacity.
And yet its cash pile is growing at 60% per year.
Buybacks are the only solution given that massive M&A is unlikely to get regulatory approval.
OK, so GOOG is one heck of a company. But quality in the top 5% of the world's best blue-chips is just one reason I've been buying GOOG during the recent market dip.
Reason Two: Exceptional Long-Term Growth Prospects
GOOG is best known for search and 12 platforms (like Gmail) that have over 1 billion users.
(Source: Statista)
YouTube, which GOOG bought for $1.65 billion in 2006, has grown into the second-largest social media network on earth. And while YouTube's member base is growing at just 5%, its revenue is growing at 32%.
| Year | Total Sales | Google Services Sales | YouTube Sales | Google Cloud Sales | Google Services Percentage Of Sales | YouTube Percentage Of Sales | Google Cloud Percentage of Sales |
| 2020 | $185,527 | $168,635 | $19,772 | $13,059 | 90.90% | 10.66% | 7.04% |
| 2021 | $254,020 | $225,290 | $29,121 | $19,549 | 88.69% | 11.46% | 7.70% |
| 2022 | $296,712 | $257,345 | $37,257 | $26,415 | 86.73% | 12.56% | 8.90% |
| 2023 | $340,853 | $290,464 | $45,771 | $34,352 | 85.22% | 13.43% | 10.08% |
| 2024 | $386,909 | $339,944 | $53,977 | $41,625 | 87.86% | 13.95% | 10.76% |
| 2025 | $447,012 | NA | $66,829 | $47,534 | 0.00% | 14.95% | 10.63% |
| 2026 | $500,209 | NA | $105,768 | $48,880 | 0.00% | 21.14% | 9.77% |
| Annualized Growth | 17.98% | 19.16% | 32.25% | 24.61% | -0.85% | 6.96% | 11.19% |
(Source: FactSet Research Terminal)
Cloud computing is growing at 25% and overall sales at 18%. Let that sink in for a moment. GOOG's revenues are over a quarter of a trillion, and yet this company is maintaining hyper-growth rates.
GOOG Medium-Term Growth Consensus Forecast
| Year | Sales | Free Cash Flow | EBITDA | EBIT (Operating Income) | Net Income |
| 2020 | $185,527 | $42,843 | $67,912 | $41,224 | $40,269 |
| 2021 | $254,020 | $70,707 | $105,856 | $77,310 | $72,940 |
| 2022 | $296,712 | $79,642 | $120,174 | $86,875 | $76,241 |
| 2023 | $340,853 | $90,468 | $137,178 | $99,337 | $85,934 |
| 2024 | $386,909 | $101,022 | $160,980 | $118,754 | $100,962 |
| 2025 | $447,012 | $113,716 | $184,699 | $139,489 | $120,585 |
| 2026 | $500,209 | $124,774 | $212,999 | $160,864 | $138,987 |
| Annualized Growth | 17.98% | 19.50% | 24.08% | 30.28% | 25.83% |
(Source: FactSet Research Terminal)
And that's not just for its top line, but every bottom-line metric as well.
For context, a few years ago, Saudi Aramco, the world's largest oil company, held the record of the largest profit in history, $108 billion in a single year.
By 2024 GOOG is expected to purpose that and still be growing earnings at over 20% annually.
| Metric | 2020 Growth | 2021 Growth Consensus | 2022 Growth Consensus | 2023 Growth Consensus | 2024 Consensus | 2025 Consensus | 2026 Consensus |
| Sales | 15% | 41% | 17% | 15% | 14% | 16% | 12% |
| EPS | 19% | 85% | 5% | 13% | 21% | 23% | 23% |
| Operating Cash Flow | 21% | 49% | 16% | 14% | 25% | 14% | 13% |
| Free Cash Flow | 41% | 63% | 16% | 14% | 19% | 16% | 15% |
| EBITDA | 18% | 97% | 13% | 14% | NA | NA | NA |
| EBIT (operating income) | 18% | 92% | 12% | 15% | NA | NA | NA |
(Source: FAST Graphs, FactSet Research)
2022 is expected to be a slower growth year, purely because of GOOG nearly doubling profits in 2021. And that 85% growth is off a $40 billion net income base in 2020.
In 2026 GOOG is expected to generate $500 billion in sales, and still be growing at double digits.
What about GOOG's long-term outlook?
GOOG Long-Term Growth Outlook
(Source: FactSet Research Terminal)
- 18.9% to 21.0% CAGR consensus range
Smoothing for outliers historical margins of error are 5% to the upside and 10% to the downside.
- 17% to 23% CAGR historical margin-of-error adjusted growth consensus range
(Source: FAST Graphs, FactSet Research)
GOOG is expected to keep growing at the same rate as the last 13 years.
Top 5% quality among the world's best blue-chips, and hyper-growth as far as the eye can see. And all this is still available at a reasonable price despite a 67% rally in 2021.
Reason Three: A Classic Buffett-Style "Wonderful Company At A Fair Price"
(Source: FAST Graphs, FactSet Research)
Billions of investors have determined that 25.5X to 27.5X earnings is approximate intrinsic value.
(Source: FactSet Research Terminal)
GOOG is trading at 15.6X 2022 EV/EBITDA, thanks to its mountain of cash (historical 16.1).
- EV/EBITDA = market cap - cash/cash flow
- Private equity and Joel Greenblatt's favorite valuation metric
- "the acquirer's multiple"
Never in history has it been a mistake to pay less than 16X EV/EBITDA for a company of this high quality, growing at 19% per year. And today is unlikely to be the first time.
| Metric | Historical Fair Value Multiples (8-Years) | 2021 | 2022 | 2023 | 2024 | 12-Month Forward Fair Value |
| P/S | 6.26 | NA | NA | $3,168.39 | $3,663.35 | |
| Earnings | 26.42 | $2,866.80 | $2,999.98 | $3,385.67 | $4,178.85 | |
| Operating Cash Flow | 17.65 | $2,492.85 | $2,882.97 | $3,277.88 | $3,755.74 | |
| Free Cash Flow | 30.22 | $3,064.71 | $3,542.51 | $4,048.13 | $5,570.45 | |
| EBITDA | 20.15 | NA | NA | $4,093.97 | NA | |
| EBIT (operating income) | 26.05 | $2,988.51 | $3,349.97 | $3,868.41 | NA | |
| Average | $2,835.11 | $3,172.10 | $3,601.77 | $4,175.14 | $3,172.10 | |
| Current Price | $2,917.99 | |||||
Discount To Fair Value | -2.92% | 8.01% | 18.98% | 30.11% | 8.01% | |
| Upside To Fair Value | -2.84% | 8.71% | 23.43% | 43.08% | 8.71% | |
| 2021 PE | 2022 PE | 2022 Weighted EPS | 12-Month Forward PE | 12-Month Average Fair Value Forward PE | Current Forward PE | |
| $108.49 | $113.53 | $113.53 | $113.53 | 27.9 | 25.7 |
(Source: DK Research Terminal, FactSet)
GOOG is historically worth about 28X earnings, factoring in all its valuation metrics. Today, it trades at less than 26X and is about 8% undervalued.
That makes it a potentially good buy for anyone comfortable with its risk profile.
Analyst Median 12-Month Price Target | Morningstar Fair Value Estimate |
| $3,351.49 (29.5X earnings) | $3,470 (30.6X earnings) |
Discount To Price Target (Not A Fair Value Estimate) | Discount To Fair Value |
| 12.76% | 15.74% |
Upside To Price Target (Not Including Dividend) | Upside To Fair Value (Not Including Dividend) |
| 14.63% | 18.68% |
(Source: DK Research Terminal, FactSet)
Analysts expect GOOG to rise another 15% over the next year, 6% more than the S&P 500.
| 12-Month Forward S&P Bottom-Up Consensus | 5225 | Forward PE Forecast (12 Months From Now) | Forward Overvaluation Forecast (12 Months From Now) |
| 12-Month Consensus Market Return Potential | 9.0% | 21.12 | 25.7% |
| 12-Month Historical Margin-of-Error Consensus Market Return Potential | 7.4% | Historical Margin Of Error | 1.60% |
(Source: DK S&P 500 Valuation And Total Return Tool)
And that forecast is both justified by fundamentals, and also likely market-beating returns... after a 67% rally in 2021.
Mind you I don't actually care about 12-month price targets, which never have any basis in our recommendations.
| Time Frame (Years) | Total Returns Explained By Fundamentals/Valuations |
| 1 Day | 0.02% |
| 1 month | 0.4% |
| 3 month | 1.25% |
| 6 months | 2.5% |
| 1 | 5% |
| 2 | 16% |
| 3 | 25% |
| 4 | 33% |
| 5 | 41% |
| 6 | 49% |
| 7 | 57% |
| 8 | 66% |
| 9 | 74% |
| 10 | 82% |
| 11+ | 90% to 91% |
(Sources: DK S&P 500 Valuation And Total Return Potential Tool, JPMorgan, Bank of America, Princeton, RIA)
- over 12 months luck is 20X as powerful as fundamentals
- over 11+ years fundamentals are 11X as powerful as luck
What we care about is whether or not today's investors are being sufficiently compensated for GOOG's risk profile.
| Rating | Margin Of Safety For Low-Risk 13/13 Ultra SWAN Quality Companies | 2021 Price | 2022 Price | 12-Month Forward Fair Value |
| Potentially Reasonable Buy | 0% | $2,835.11 | $3,172.10 | $3,172.10 |
| Potentially Good Buy | 5% | $2,693.36 | $3,013.49 | $3,013.49 |
| Potentially Strong Buy | 15% | $2,409.85 | $2,696.28 | $2,696.28 |
| Potentially Very Strong Buy | 25% | $2,020.02 | $2,379.07 | $2,379.07 |
| Potentially Ultra-Value Buy | 35% | $1,842.82 | $2,061.86 | $2,061.86 |
| Currently | $2,923.84 | -3.13% | 7.83% | 7.83% |
Upside To Fair Value (Not Including Dividends) | -3.03% | 8.49% | 8.49% |
Today, GOOG is a potentially good buy for anyone comfortable with its risk profile and here's why. Remember how the market is expected to deliver 3% to 4% returns over the next five years?
Here's what investors buying GOOG today can reasonably expect.
- 5-year consensus return potential range: 12% to 19% CAGR
GOOG 2023 Consensus Total Return Potential
(Source: FAST Graphs, FactSet Research)
In the short term, GOOG's potential returns are modest but still a lot better than the S&P 500 or other tech giants like Microsoft (MSFT).
(Source: FAST Graphs, FactSet Research)
But over the long term? That's where GOOG's hyper-growth at a reasonable price comes into play.
GOOG 2026 Consensus Total Return Potential
(Source: FAST Graphs, FactSet Research)
- if GOOG grows as expected and returns to historical mid-range fair value
- then 95% total returns or 14% CAGR
- almost 5X more than the S&P 500 consensus
How many ways can you think of to double your money in the next five years, in today's 32% overvalued market, that has a 1 in 250 chance of going to zero?
GOOG Investment Decision Score
(Source: DK Automated Investment Decision Tool)
If you're comfortable with its risk profile, GOOG is as close to a perfect hyper-growth Ultra SWAN investment as you can find in today's 32% overvalued market.
But wait, it gets so much better. It's likely to be years before GOOG pays dividends. So, here's how to turn GOOG into a safe retirement income dream machine.
Risk Profile: Why Alphabet Isn't Right For Everyone
There are no risk-free companies, and no company is right for everyone. You have to be comfortable with the fundamental risk profile.
GOOG's Risk Profile Includes
- political/regulator risk (anti-trust threats)
- market share risk (from major rivals like Amazon (AMZN) whose ads are 4X as effective as GOOG's)
- disruption risk (web 3.0 potentially will allow everyone to own their data and monetize it, forcing GOOG to pay part of its current profits on data to users)
- M&A execution risk (lots of small bolt-on acquisitions, and a lack of large M&A opportunities due to regulatory concerns over anti-trust)
- talent retention risk (tightest job market in over 50 years)
- currency risk (as sales become more international)
- cyber-security risk: hackers and ransomware
How do we quantify, monitor, and track such a complex risk profile? By doing what big institutions do.
Material Financial ESG Risk Analysis: How Large Institutions Measure Total Risk
- 4 Things You Need To Know To Profit From ESG Investing
- What Investors Need To Know About Company Long-Term Risk Management (Video)
Here is a special report that outlines the most important aspects of understanding long-term ESG financial risks for your investments.
- ESG is NOT "political or personal ethics based investing"
- its total long-term risk management analysis
ESG is just normal risk by another name." Simon MacMahon, head of ESG and corporate governance research, Sustainalytics" - Morningstar
ESG factors are taken into consideration, alongside all other credit factors, when we consider they are relevant to and have or may have a material influence on creditworthiness." - S&P
ESG is a measure of risk, not of ethics, political correctness, or personal opinion.
S&P, Fitch, Moody's, DBRS (Canadian rating agency), AMBest (insurance rating agency), R&I Credit Rating (Japanese rating agency), and the Japan Credit Rating Agency have been using ESG models in their credit ratings for decades.
- credit and risk management ratings make up 41% of the DK safety and quality model
- dividend/balance sheet/risk ratings make up 82% of the DK safety and quality model
Dividend Aristocrats: 67th Industry Percentile On Risk Management (Above-Average, Medium Risk)
(Source: Morningstar)
GOOG Long-Term Risk Management Consensus
| Rating Agency | Industry Percentile | Rating Agency Classification |
| MSCI 37 Metric Model | 64.0% | BBB average |
| Morningstar/Sustainalytics 20 Metric Model | 52.5% | 22.9/100 Medium-Risk |
| Reuters'/Refinitiv 500+ Metric Model | 92.9% | Good |
| S&P 1,000+ Metric Model | 47.0% | Average (Positive Trend) |
| Just Capital 19 Metric Model | 92.86% | Excellent |
| Consensus | 69.8% | Good |
| FactSet Qualitative Assessment | Average | Positive Trend |
(Sources: MSCI, Morningstar, Reuters', S&P, Just Capital, FactSet Research)
GOOG's Long-Term Risk Management Is The 185th Best In The Master List (63rd Percentile)
(Source: DK Master List) - 8 non-rated companies mean GOOG is in 185th place
GOOG's risk-management consensus is in the top 37% of the world's highest quality companies and similar to that of such other companies as
- Qualcomm (QCOM)
- Royal Bank of Canada (RY)
- Verizon (VZ)
- PPG Industries (PPG) - dividend aristocrat
- Magellan Midstream Partners (uses K-1) (MMP)
- Ecolab (ECL) - dividend aristocrat
- Hormel Foods (HRL) - dividend king
The bottom line is that all companies have risks, and GOOG is good at managing theirs.
How We Monitor GOOG's Risk Profile
- 49 analysts
- 2 credit rating agencies
- 7 total risk rating agencies
- 56 experts who collectively know this business better than anyone other than management
- and the bond market, the "smart money" on Wall Street
When the facts change, I change my mind. What do you do sir?" - John Maynard Keynes
There are no sacred cows at iREIT or Dividend Kings. Wherever the fundamentals lead we always follow. That's the essence of disciplined financial science, the math retiring rich and staying rich in retirement.
Bottom Line: Alphabet Is One Of The Best Hyper-Growth Blue-Chips You Can Buy In 2022 And Beyond
2022 is sure to bring a lot of surprises and a lot of opportunities for prudent investors.
Luck is what happens when preparation meets opportunity." - Roman philosopher Seneca the younger
With the market melting up, led primarily by mega-cap tech, it's natural to assume that there are no safe blue-chips you can buy.
But as we've just seen, Alphabet is a classic Buffett-style "wonderful company at a fair price".
Over the long term, GOOG is capable of potentially 19% long-term returns, thanks to its numerous secular megatrend opportunities driving over 20% growth through at least 2026.
If you're tired of praying for miracles when it comes to retirement, then try making your own.
If you're tired of worrying about the market in the short term, it's time to stop gambling and start investing for your future.
If you're sick of losing sleep over your portfolio, then it's time to embrace Ultra SWAN blue-chip investing.
When you combine the world's best hyper-growth and high-yield blue-chips, and prudent risk management, the rich retirement of your dreams becomes a matter of time and not luck.
From everyone at iREIT and Dividend Kings, I want to wish you and your family a safe, healthy, relaxing, and prosperous new year.
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This article was written by
Dividend Sensei (Adam Galas) is an Army veteran and stock analyst with 20+ years of market experience.
He is a founding author of the investing group The Dividend Kings which focuses on helping investors safeguard and grow their money in all market conditions through the highest-quality dividend investments. Dividend Sensei and the team of analysts (Brad Thomas, Justin Law, Nicholas Ward, Chuck Carnevale, and Sebastian Wolf) help members invest more intelligently in dividend stocks. Features include: 13 model portfolios, buy ideas, company research reports, and a thriving chat community for readers looking to learn how to invest more intelligently in dividend stocks. Learn more.Analyst’s Disclosure: I/we have a beneficial long position in the shares of GOOG, GOOGL either through stock ownership, options, or other derivatives. 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.
Dividend Kings own GOOG, and GOOGL in our portfolios.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (189)
i have to gather money
;)
2016 3.693
2017 4.846
2018 9.075
2019 18.396
2020 31.149
2021 36.81 (only 3 quarters)2021 is estimated at 48B (36/3*4).
2023: 21.0
2024: 17.4
2025: 14.1
2026: 11.5If GOOG were flat through 2026 and grows as expected, it would be trading at 11.5X earnings and EV/EBITDA of 8.3.And now imagine that GOOG keeps growing for 15 years beyond that. For that to happen GOOG would have to trade at 0.8X earnings. And for a 50% upside, the PE would be 1.2 in 15 years. Not 12, which itself is absurd, but 1.2. As in an 83% earnings yield.
