My research suggests to me that the market significantly undervalued Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) in early 2023. Now, the price is up almost 42% in just a year. While the amazing value opportunity might not be there anymore, I still think the shares are cheap. Here’s why Alphabet is one of my top stocks to buy at the moment.
Continuing to pioneer
It isn’t just a search engine now. These days, the company is involved in AI, cloud operations, YouTube, Waymo (autonomous vehicles), and health and biotechnology. The firm is an expansive technology holding company responsible for one of the most important digital ecosystems on the planet.
I think CEO Sundar Pichai did the right thing by pivoting the company to focus on AI. But now, Google is being slightly undervalued for its potential in the area because of competition from the likes of OpenAI’s ChatGPT. That puts Microsoft and Google head-to-head, as Microsoft is a big shareholder in OpenAI.
However, even given the competition, I think there’s room for many big AI companies to succeed. I also think Google will continue to be one of them for a very long time.
Assessing the financials
Alphabet’s revenues continue to grow strongly, with a 10-year median of 22%. Additionally its earnings without non-recurring items have been growing at a 10-year median of 26.5%.
Another element I really like about the company is its balance sheet. At the moment, it holds a lot more equity than liabilities.
Also, its free cash flow margin of nearly 22% is very strong. Free cash flow is a key measure of a company’s real earnings because it includes all expenses and investments, showing how much cash is actually available. This is important for things like paying dividends, buying back shares, reducing debt, or reinvesting in the business.
Still a value opportunity
Even after this year’s price growth, I think the shares are still appealing for me to buy right now. The primary reason I think this is that Alphabet is in a very rare situation.
Most big tech companies trade above what I would consider intrinsic value, which is the actual worth of a business estimated by forecasting earnings or cash flows. However, that’s not the case with Alphabet shares.
Based on my model, the business looks undervalued by roughly 20% right now. That’s an amazing opportunity, in my opinion, and I’m planning to increase my stake accordingly.
Always acknowledging the risks
Even though the investment looks compelling to me right now, I think the competition from other firms is rising, and I need to consider that.
One company I feel the market has undervalued for its future impact on AI right now is Tesla. If Elon Musk decides to undercut Waymo in price and offer a more expansive fleet of autonomous vehicles, it would affect Alphabet shareholders.
Also, let’s not underestimate ChatGPT. I think it could endure as the leading AI software company for some time. The firm will have to navigate to create a unique position in the market accordingly.
It’s a buy for me
Putting all of this into perspective, I think Alphabet is far and away a long-term Buy for me. I love the business, and I can’t wait for my stake to potentially grow over many decades.
