Alphabet (NASDAQ:GOOG), Google’s parent firm, is the most low-key of the mega-cap tech corporations. The value is lower than that of peers such as Apple (AAPL) and Amazon (AMZN). While the business invests extensively in R&D, its efforts are not indiscriminate. Google hasn’t poured billions of dollars into establishing a new world. It has been lucky to remain mainly out of politics, unlike the companies formerly known as Facebook (META) and Twitter (TWTR). While not as volatile as the NASDAQ (QQQ), Google stock is no slouch, having returned 19.3% annually since its highly anticipated IPO in 2004. The stock peaked slightly above a split-adjusted $150 per share in late 2021 and is currently trading at $109 per share as I write this. So, is Google a good investment at this price, and if not, where should you look?
Google’s PE ratio is roughly the same as ten years ago, unlike numerous NASDAQ firms whose stocks have dramatically outperformed their underlying businesses.
However, as I said in my Microsoft (MSFT) post last week, Google is one of the major holdings in ETFs, connecting the company inexorably to the macro picture and the Fed’s attempts to combat inflation.
Even while the business is healthy, Google, like all other tech firms, will likely be sold down when risk sentiment shifts. This may be a good opportunity.
Why Are Stocks Declining?
I’ve written about macro photography a few times on this blog. Overall, the market is correcting but remains somewhat overpriced. Corporate America has performed well in recent years. Yet, share prices have progressively increased faster than the underlying profitability of corporations. During this period, values rose from a bit high to entirely out of control in late 2021, despite uncertain profit growth predictions. I provided that fiscal stimulus had artificially boosted corporate profitability, while the Fed’s free money COVID policies had artificially inflated values. As a result, while nothing fundamentally changed under the hood to improve the economy, equities surged spectacularly in 2021.
As a result, equities have fallen precipitously in 2022, with stimulus now in the rearview mirror and rates beginning to normalize. However, when the markets tumble, the valuations of certain firms begin to appear more appealing. As a result, our plan here is straightforward: take advantage of the sinking market to buy equities at a discount.
“Purchase the dip” is a popular investment approach, but the caveat is that you must buy strong companies when their values fall, not just bad stocks because they’re down. Seeking Alpha is an excellent location to determine whether stock price decreases are warranted. Software tools like FAST Graphs may also assist you in making these choices. Google isn’t a difficult choice for me—it’s an excellent company. Looking at the company’s financial accounts for the previous ten years reveals that it is a growth machine (in this case, the best line to look at is “normalized diluted earnings per share” to avoid holding tax charges from the 2017 tax bill against them).
Buying blue-chip firms on market drops are like making chicken parmesan, while investing is like cooking. It’s sturdy, flavorful, and difficult to mess up. Of course, nobody will give us a Michelin star for this method, but it does provide a way to double your money in around five years with no fanfare or drama.
Google is a fantastic corporation. The question is how much to pay for it.
Google’s Valuation
Google is now trading at around 18 times projected earnings in 2023. Yes, these forecasts are being revised lower by experts, so Google isn’t exactly as dirt cheap as it looks. Nevertheless, the firm is still reasonably priced. Why should Google be valued at around the same as the S&P 500? It should not be. Google has superior long-term growth potential than the typical S&P 500 corporation. Thus it should be valued higher. Coca-Cola (KO) trades at 24 times profits, and analysts forecast 5-6% yearly growth (which history suggests will be missed).
Given the macro challenges but Google’s outstanding long-term potential, anything under $100 looks pretty nice. Anything under $90 is much better, removing much of the Fed/macro risk from the stock. Google’s development trajectory indicates that it will be a $200 stock in 5-6 years; any additional stock price falls are likely to be favorable buying opportunities.
A Google easter egg: the corporation has various share classes. Class A stock (NASDAQ: GOOGL) is somewhat less expensive than Class C stock (GOOG). Although there is no practical difference between them, the Class A stock is around 1% less expensive than the more popular Class C stock. This will normalize over time. For one, Google has recently started to buy class A shares with the buyback if they’re cheaper. So buy the Class A shares for a roughly 1% discount and a little additional edge.
Bottom Line
Google is the cheapest stock in the top 10 holdings of the S&P 500. During bear markets, stocks like Google go on sale despite their strong long-term business prospects being good. You can buy now and get decent long-term compensation, but I’d look to buy GOOGL stock for under $100. If you can do that, chances are that you can double your money in a few years.
Featured Image – Megapixl © Clarsen55
