Alphabet Class A (NASDAQ:GOOGL) stock is experiencing significant unusual put option activity today. These puts are set to expire after Friday, indicating short-term trading strategies.
On December 20, 2023, over 26,400 contracts of $140 strike price puts expiring on December 22 have been traded. Additionally, more than 15,400 puts at the $139 strike price for the same expiry period have been exchanged.
With GOOG stock trading at $140.60 per share, these puts are slightly out-of-the-money (OTM). A slight decline to $140.00 or $139.00 (i.e., -0.43% or -1.13% respectively) would require put sellers to purchase a substantial number of GOOGL stock shares.
For instance, the potential obligation of the $140 short-put sellers would exceed $369.6 million (i.e., $140 x 26,200 contracts x 100). In such a scenario, traders are likely to cover their obligation.
It’s noteworthy that this volume of puts significantly surpasses normal levels. The Vol/OI (Volume/Open Interest) column indicates that the $140 puts are over 140 times the previous number of outstanding put contracts, while the $139 strike price puts are almost 100 times the normal volume. This suggests that these short-term trades may involve large institutional accounts or hedge funds.
These activities could also indicate a scenario where long investors are hedging their positions in GOOGL stock by purchasing a substantial number of put contracts expiring on Friday. In both scenarios, traders anticipate that any stock decline will be offset by a rise in put prices.
What can be inferred from these trades? Examining the valuation of GOOGL stock provides insights.
Alphabet And GOOGL Stock Valuation Analysis
Despite a significant rise in tech stocks, GOOGL has seen a notable increase in the past month. Concerns of a potential reversal may be prompting institutional funds to buy puts as a protective measure against downside risks.
However, from a valuation perspective, Alphabet stock appears reasonably priced. Analysts anticipate $6.70 in earnings per share (EPS) next year, reflecting a 16% increase from the 2023 forecast of $5.77 EPS. This positions GOOGL stock with a 2024 forward earnings multiple of 20.8x, which is considered reasonable given historical data.
Furthermore, considering Alphabet’s robust free cash flow (FCF), the stock seems undervalued. In Q3, Alphabet generated $22.6 billion in FCF, representing 32.7% of its quarterly revenue. Extrapolating this to the estimated $340 billion in revenue next year, Alphabet is projected to generate over $111 billion in FCF.
Applying a 3.33% FCF yield, the stock would have a valuation of $3,369 billion. This assumes that all $111 billion in FCF is paid out as a dividend, and the stock market gives GOOGL stock a 3.33% dividend yield. This valuation, when compared to the current market cap of $1.72 trillion, suggests a potential 96% increase in GOOGL stock over the next year.
In conclusion, GOOGL stock is potentially undervalued by 21% to 96%, making it an attractive investment. Despite its recent rise, shareholders may find value in holding onto their positions, considering the substantial upside potential.
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