Alphabet Class A stock (NASDAQ:GOOGL), has witnessed significant and unusual options activity, particularly in near-term in- and at-the-money (ATM) put trades, as reported on Wednesday, Nov. 22. This atypical movement has prompted speculation about potential intricate income plays and strategic moves by large institutional investors.
Highlighted in a distinctive Barchart report titled the Unusual Stock Options Activity Report, six large options tranches were noted, with five of them involving in- and at-the-money put option trades set to expire in the near term—specifically on Nov. 24, Dec. 1, and Dec. 15. Additionally, there was a sizable call option tranche for Dec. 15, slightly out-of-the-money. The scale of these trades, coupled with their proximity to the market price, raises questions about the motives behind these moves.
It’s suggested that a significant institutional investor might be leveraging these trades to capitalize on the anticipated slow trading activity on Friday, especially considering the early market closure on Nov. 24. Notably, the volume of these options trades significantly exceeded the usual outstanding contracts in the respective tranches, as indicated by the “Vol/OI” (Volume/Open Interest) column in the report.
Analyzing Alphabet’s Financial Standing
Despite the unusual options activity, Alphabet reported stellar Q3 results on Oct. 24. The company demonstrated an 11% year-over-year increase in revenue on a constant currency basis, reaching $76.69 billion. Furthermore, its free cash flow (FCF) for Q3 surged to $22.6 billion, marking a substantial 40.6% YoY increase. The FCF margin remained robust at 29.5%, reflecting sustained growth in key financial metrics.
However, since the Q3 earnings release, GOOGL stock has exhibited a stagnant trend, trading around $138.11, down from $138.81 on Oct. 24. This seeming plateau might explain the surge in near-term option plays around market prices.
Potential Undervaluation and Long-Term Outlook
Despite the flat performance in recent weeks, analysts argue that GOOGL stock remains undervalued. Forecasts indicate an 11.2% growth in revenue for the next year, reaching $340.22 billion. Estimating an FCF exceeding $100 billion in 2024 and applying a 4% FCF yield, equivalent to a 25x FCF multiple, suggests a potential market cap increase to $2.55 trillion.
Even with a more conservative 5% FCF yield (20x FCF), the target market cap is estimated at $2.04 trillion, indicating a 15.3% gain in GOOGL stock. This assessment suggests the possibility of a 15% to 44% rise in the stock in the coming year, emphasizing its potential for long-term investors.
The advice to investors is to avoid getting overly involved in intricate short-term options plays with GOOGL stock and instead consider the favorable long-term prospects indicated by its undervaluation and anticipated growth.
Featured Image: Unsplash
Author Faith Yakubu 
