Finding a good value stock is all about locating excellent companies that the broader market at the moment isn’t as excited about as it ought to be. I think it’s much easier to be a good value investor if I have a long-term mindset. A lot of people think of investing as a short-term gig. They want to get in and get out with a profit.
That’s not how I look at it. Instead, I take Warren Buffett‘s advice. I want to hold companies forever if possible.
I think one of the best times to buy a great company is when it’s going through an issue. As long as the problem isn’t disastrous in the long term, the lower investor sentiment can reduce the price for me and help me to buy at a more appealing valuation.
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That’s exactly what I think I’ve got on my hands right now with Alphabet (NASDAQ:GOOGL), also known as Google.
The issues that fuel the opportunity
At the moment, Google is struggling with some of its AI. It initially engineered its much-anticipated Gemini model to produce results to support diversity, equity, and inclusion initiatives. As most AI users are much more interested in accuracy and factual results than political agendas, Gemini has notably been scorned by the technology community. I believe this has reduced investor sentiment.
However, I also think a lot of investors fear that Google isn’t as efficient as it could be these days. Technology leaders from other firms have expressed some concern that it has allowed its workforce to become too large. Unfortunately, it might also not be meritocratic enough.
But I think the company will sort out both of these issues in due course. For example, executive management is already on the case to fix the Gemini AI issue. And as Google is a leader in advanced technology, I find it highly likely it’s going to more aggressively implement automation within its business model to drive higher profitability and more efficiency.
Why the valuation is appealing to me
The above reasons may be part of a larger latticework of issues Google is facing at the moment. In turn, this makes its valuation more reasonable than otherwise. If everything were deemed perfect and high growth, the market would be buying the shares at a pace that could introduce more risk.
Instead, Google is surprisingly attractively valued. Even with a discounted cash flow analysis I performed, which assesses valuation based on future cash flows, the firm might be 20% undervalued. That’s surprising because technology companies usually trade at such a high price that I can’t use that valuation model. However, world-class investors usually consider it an excellent safety net if they assess a company’s value this way. In my eyes, this is a no-brainer opportunity.
I’m so confident in Google’s valuation, and I believe so strongly in its long-term position, that I increased my Google holdings by 33% at the end of April. In my eyes, the firm’s moat in advanced tech is difficult to beat. What matters now is a little bit of course correction. I’ll monitor this closely, but with a decent valuation, I think I can sleep much better at night than with other technology companies that carry a lot more risk in price.
