With impending rate hikes approaching, investors are becoming increasingly wary of earnings potential being stifled. These concerns are even more pronounced around companies with high levels of debt as a high interest rate environment may damper their ability to repay their liabilities.
Thankfully, Alphabet (NASDAQ: GOOGL) does not have to worry about such an issue, as the world’s third largest technology company has a rock-solid balance sheet. It boasts an extremely healthy 5.1% debt-to-equity ratio, $188bn in short-term assets ($64bn in short-term liabilities), and $171b in long-term assets ($43bn in long-term liabilities). It has almost $140bn worth of cash and equivalents, giving it plenty of capital to continue investing in future growth.
High-quality earnings
As lower profit margins in a high inflation environment continue to hit company margins, Alphabet defies the trend with an increasing profit margin of 29.5% in Q4 2021; this is an increase of 7.4% Y/Y. Such high-quality earnings give me a tremendous amount of confidence as it demonstrates the company’s ability to maintain high profitability in times of difficulty.
As such, I continue to place confidence in Alphabet’s management, and specifically CFO Ruth Porat, who has shown her financial acumen since she took the reigns in 2015. Having had experience on Wall Street as CFO of Morgan Stanley, I have no doubts that Alphabet will be able to weather the storm of a high inflation environment, and potentially a slower economy to come by allocating capital efficiently.
Cheap valuation
At the time of writing, Alphabet has a price-to-earnings (P/E) ratio of 23.63. This makes Alphabet’s stock reasonably priced considering that the tech sector’s average P/E ratio is currently at 27.2. The stock price screams better value when looking at analysts’ price targets for the stock, with an average price target of $3500, presenting a 32% upside to its current share price.
Although Alphabet’s shares popped over 7% after its stellar earnings report at the beginning of the month, it has fallen 10% since due to macroeconomic influence. Therefore, as a long-term shareholder, I see this as an opportunity for me to buy more shares for my portfolio at an extremely reasonable price. Additionally, the board’s decision to make a 20-1 stock split to lure smaller investors and encourage higher trading volume in June will do the stock a lot of good as it shows that the company is thriving.
One thing to look out for
Although Alphabet possesses rigorous fundamentals, a huge majority of its revenue stems from Google and YouTube, by the way of search and video advertisements. Whilst the two platforms have a monopoly in their respective spaces, there is always a risk that a change in sentiment within the advertising industry could put a big dent in Alphabet’s profit margins. Nevertheless, I am confident that just like utilities, energy, and consumer staples, Alphabet’s business model makes it a hybrid defensive-growth stock as technological adoption continues to increase across many industries today.
