Alphabet Inc. (NASDAQ:GOOG) has demonstrated resilience amidst the recent August market downturn, experiencing only a modest 1.83% decline. Presently, the stock is displaying a recovery trend, with morning trading on August 22 reflecting a value of $130.67 per share, down from $133.11 at the close of July. The appeal of Alphabet lies in its substantial free cash flow (FCF), which has garnered the attention of value-oriented investors seeking promising opportunities.
Moreover, the company has managed to attract options traders who specialize in selling short out-of-the-money (OTM) put options to generate income. Furthermore, the company experienced over 26% quarter-over-quarter growth in FCF, a notable achievement that contributes to explaining the stock’s relatively positive performance over the past month despite the broader tech sector’s decline.
Implications for GOOG Stock Investors
At present, GOOG stock boasts a favorable forward price-to-earnings (P/E) ratio, trading at approximately 23 times earnings for the year 2023 and 19.5 times earnings for the year ending December 2024. This valuation stands significantly below its 5-year average forward P/E ratio of 25.1, as indicated by data from Morningstar.com.
Given these metrics, a potential rise to the historical average forward P/E ratio would translate to an increased valuation for GOOG stock. Calculations based on 2023 earnings suggest a potential appreciation of 9.1%, while projections based on 2024 earnings indicate a substantial 28.7% potential increase. Consequently, the estimated value of GOOG stock ranges from $142.56 to $168.17 per share, with an average target price of $155.36 per share. This figure slightly surpasses the average price target of $142.30 per share reported by Yahoo! Finance, based on a survey of 10 analysts.
Furthermore, an independent analysis of FCF conducted in a previous article suggests that GOOG stock could hold a value as high as $217.88 per share.
In essence, regardless of whether a P/E ratio or FCF-based approach is employed, it becomes evident that GOOG stock’s intrinsic value surpasses its current market price. This dynamic makes it an appealing choice for value investors seeking long-term prospects.
Seizing Opportunity with Short-Put Strategies
A prudent method to capitalize on the anticipated upside potential in the short term involves engaging in the sale of short out-of-the-money (OTM) put options. This strategy serves to reduce the cost of entry if the puts are exercised and offer an additional stream of income. Notably, Alphabet does not currently issue dividends, making this approach an attractive means of combining potential stock gains with immediate earnings.
For instance, a previous article recommended the sale of Aug. 25 expiration $130 strike price puts. On July 30, these options yielded a premium of $2.76 per put option sold short. Subsequent developments have caused these puts to decrease to $1.19, resulting in a successful trade.
Consideration could be given to rolling over this strategy for an extended expiration period. This involves repurchasing the shorted put option (termed “Buy to Close”) and initiating a new put trade (“Sell to Open”).
A glance at the Sept. 15 expiration put option chain, set slightly over 3 weeks ahead, reveals $126 puts trading at $1.81 per contract. This signifies a 1.44% income for the short seller, predicated on a strike price positioned 3.50% below the current market value.
As an illustration, a trader with $12,600 in available capital can “Sell to Open” 1 put at $126.00 for the Sept. 15 expiration, yielding an immediate credit of $181.00. This equates to an instantaneous yield of 1.44% ($181/$12,600).
In summary, investors can adopt a cautious yet advantageous stance in relation to the upward potential of GOOG stock today. This strategy is most effective when combined with stock ownership and short selling of OTM puts. Even in the event that the stock price descends to $126.00 or below by the specified expiration date, investors can potentially mitigate their entry costs while retaining the income generated through the sale of OTM puts. This approach proves profitable, particularly when executed consistently over time.
Featured Image: Megapixl
