Summary
While Alphabet's big tech peers are hitting new all-time highs or getting close to doing so, GOOGL stock is still sitting roughly 20% off its all-time highs of ~$150.
In this note, I shall provide an update on my 5-yr CAGR return expectations for Alphabet.
Furthermore, we will look into the potential pathway for Alphabet stock to hit new all-time highs in 2023.
Under the caveat of pursuing slow, staggered accumulation, I rate Alphabet stock a modest "Buy" at current levels.
brightstars
Introduction
In my latest report on Alphabet Inc. $Alphabet(GOOG)$ $Alphabet(GOOGL)$, I rated the stock a "BUY" based on its Q1 earnings report, valuations, technicals, and quant factor grades. Here's what I wrote in this bullish report:
After a sharp correction in 2022, Alphabet's stock has rebounded by ~20% so far in 2023. As of today, Alphabet's technical chart looks finely poised, with the stock trading at a key resistance level. In the near term, a break out above $110 could enable the stock to climb up to the $120-125 level.
WeBull Desktop
Conversely, a rejection here could see Alphabet pulling back down into the $85-95 range. Technically, the risk/reward in Alphabet is quite balanced. With the economy seemingly headed toward a recession, I think erring on the side of caution is the right approach. Hence, I strongly prefer a staggered accumulation over 6-12 months over a lump sum purchase of Alphabet shares.
Source: Alphabet Stock: Earnings, Buybacks, Valuations, Technicals, And More
Since I made this call in early May, Alphabet's stock has bounced up by ~16.5%, and it is now trading in the $120-125 range we discussed in our detailed post-earnings analysis.
WeBull Desktop
In today's note, we shall re-evaluate our expected return for Alphabet in light of this significant jump in the stock. Furthermore, we will try to reason out a potential path to new all-time highs for Alphabet's stock in 2023.
Alphabet's Fair Value And Expected Return
Since we are simply looking to assess the impact of the jump in GOOGL's stock price on its expected returns, I will not repeat the finer details of the model in this note. However, if you're interested, a detailed explanation of our valuation model for Alphabet is available in this report on SA.
Here's TQI's latest valuation model for Alphabet:
TQI Valuation Model (TQIG.org)
As you can see above, Alphabet's fair value is still ~$109 per share (or $1.4T market cap). With the stock currently trading around $125, Alphabet now looks overvalued by ~15%. That said, Alphabet has a positive net cash balance of ~$103B (or roughly ~$8 per share). If we were to add this net cash back to its fair value (derived by DCF), Alphabet is only slightly overvalued.
While Alphabet's fair value estimate remains unchanged, the bounce in GOOGL stock has altered its expected returns significantly. Here's where 5-yr CAGR expected returns stand now:
TQI Valuation Model (TQIG.org)
Assuming a base case P/FCF (exit) multiple of ~20x, I see Alphabet's stock rising from $125 to $228 at a CAGR rate of ~13% over the next five years. Since Alphabet's expected CAGR return is now lower than my investment hurdle rate of 15%, GOOGL stock is no longer a "Buy" at its current levels under our valuation process.
While Alphabet's risk/reward is not good enough to warrant a fresh long-term investment here, momentum in GOOGL (and the tech sector in general) can easily carry the stock higher in the near term amid rising investor interest in artificial intelligence [AI].
Is Google Stock Projected To Go Up?
As we have discussed in the past, Alphabet is likely to be a big winner in the artificial intelligence space, and consensus analyst estimates from Wall Street firms suggest an imminent re-acceleration in Alphabet's revenue growth and healthy double-digit earnings growth over the next five years.
SeekingAlpha
SeekingAlpha
Consequently, Alphabet's stock is projected to rise to ~$130 per share in the next twelve months based on 29 analyst ratings, with 28 "Buy", 1 "Hold", and 0 "Sell" ratings!
TipRanks
Clearly, Wall Street remains bullish on Alphabet's stock. However, with the tech-heavy Nasdaq-100 index $NASDAQ 100(NDX)$ breaking out last week, many investors are pondering whether GOOGL stock can reach new all-time highs in 2023. Let's solve this quandary!
Can Google Stock Rebound To $150 In 2023?
On the back of a stunning 16%+ jump in May, Alphabet's stock has moved up to the $120-125 range. While tech stocks $Invesco QQQ Trust(QQQ)$ are breaking out left, right, and center as investors re-build long positions dropped in the tech rout of 2022, Alphabet is still sitting ~20% off of its all-time highs, and the odds of GOOGL making new all-time highs in 2023 aren't all that great as we saw in the previous section on valuation.
WeBull Desktop
Technically, Alphabet's stock is currently sitting at a key support-resistance level at ~$125, and rejection here is likely given RSI on the daily, weekly, and monthly charts are in the overbought territory or getting very close to it. The rally in QQQ is also showing signs of exhaustion, and I can see the resolution of the debt ceiling issue and consequent liquidity drain causing a pullback in equity markets (especially in overbought tech stocks like Alphabet) during the next couple of months.
However, if Alphabet's stock manages to consolidate here for a bit and then break out to the upside, a run at ~$150 (a new all-time high) this year is not unrealistic, given growing optimism on Wall Street, strong momentum in the business & the stock, and relatively better valuation than peers.
SeekingAlpha
According to Seeking Alpha's Quant Rating system, Alphabet has a "Strong Buy" rating with a score of 4.97/5 (up from 4.88/5 in early May). While Alphabet continues to boast an "A+" rating on "Profitability" amid an earnings contraction, the earnings "Revisions" grade has improved from "D+" to "B+" over the last three months is a clear indication of an imminent recovery in earnings growth. With sales growth of ~3% y/y in Q1, Alphabet's weak quant factor grade of "C+" for "Growth" makes complete sense; however, a sales growth re-acceleration is in the offing, with consensus analyst expectations calling for a double-digit y/y growth rate for Alphabet by Q2 2024.
SeekingAlpha
SeekingAlpha
SeekingAlpha
While Alphabet's "Valuation" grade has deteriorated to "D" on the back of a sharp move up in its stock, the "Momentum" grade is now a firm "A". In my view, both Alphabet's business and stock are showing improved momentum. And in the near-term, momentum can be enough to drive a stock higher.
Now, Alphabet isn't just a technical momentum play here.
In my last note, I wrote -
While Alphabet's heavy exposure to a cyclical advertising industry is a good reason for its stock to trade at a discount to some of its big tech peers, most of these tech giants seem to have similar financial performance (i.e., single-digit revenue growth and earnings in contraction). Hence, Alphabet shouldn't really be trading at a ~30% discount to its peers on a relative basis.
As you can see below, Alphabet's forward P/E has shifted to 23.4x today (up from 20.3x in early May), narrowing some of that 30% discount, and yet, GOOGL is still one of the cheapest big tech stocks based on forward price-to-earnings multiple.
As Alphabet re-accelerates its revenue and earnings growth in the second half of 2023, GOOGL stock could easily get re-rated higher to multiples commanded by big tech peers such as Apple $Apple(AAPL)$ and Microsoft $Microsoft(MSFT)$.
Data by YCharts
If such a re-rating were to materialize, Alphabet's forward P/E could rise to ~30x. With Alphabet's 2024 EPS estimate currently sitting at $6.26, the stock could rise to ~$188 by the end of 2023!
Bottom Line
The answer to our question is - "Yes, Alphabet can get to $150 in 2023". And we now know what needs to happen for Alphabet is a reasonable amount of multiple expansion. Given the current macroeconomic environment and the elevated likelihood of a hard landing (economic recession), it is hard to foresee a trading multiple expansion. However, that's exactly what has driven the year-to-date stock market rally in 2023. Yes, the ongoing rally can still be a bear market rally, but if it's a real bull market, Alphabet has a good bit of upside from current levels.
After a significant jump in its stock price, the long-term risk/reward for Alphabet is not as attractive as it was earlier this month. However, I think a 5-yr CAGR return of ~13% from a secular growth compounder like Alphabet is acceptable to most investors. In my view, Alphabet is a better hideout than many of its big tech peers due to its relatively reasonable valuation, and so I am willing to make an exception here by reducing my investment hurdle rate for Alphabet down to 10%. Under the caveat of pursuing slow, staggered accumulation, I rate Alphabet stock a modest "Buy" at current levels.
Key Takeaway: I rate Alphabet a modest "Buy" at $125, with a strong preference for staggered accumulation.
Thanks for reading, and happy investing. Please share your thoughts, concerns, and/or questions in the comments section below.
Source: Seeking Alpha
Comments