Google is a Buy again? Read & decide.
I am bullish about Google all over again.
It will continue to recover lost ground this week as Market remains jittery about March’s FOMC meeting in 2 days time.
Based off the Marketwatch post by Philip van Doorn on 11 Mar 2024, titled “Alphabet is the bargain stock among the ‘Magnificent Seven”, the writer has laid down his viewpoints.
Sorted by market cap - Google is ranked 5th.
Price Earning Ratio (P/E).
Using the most commonly cited forward price-to-earnings ratio (P/E) to determine the each Magnificent 7’s valuation - another interesting layer is revealed. (see below)
Formula : Current price of a stock / Average earnings estimate for the next 12 months.
Note: FactSet tracks forward P/E ratios historically, based on rolling consensus estimates among analysts polled by the data provider.
- The table above shows the current forward P/E ratios along with historical averages, with weighted ratios for the S&P 500 at the bottom.
- Google currently has the lowest P/E, appearing cheap relative to both Index and its peers.
Free Cash Flow (FCF) Yield as guage.
Despite losing digital advertising market share over the past decade to $Meta Platforms, Inc.(META)$ and $Amazon.com(AMZN)$ , Google remains a cash flow gusher.
In 2023 alone, it generated $69.5 billion in FCF from Revenue of $307.4 billion.
This is a margin of +22.6%.
Mathematically, it generates nearly $0.23 in free cash flow per dollar of sales - something that cannot be ignored.
Using free cash flow yield is also another method to evaluate a stock’s relative value.
Rule of thumb:
- Anything >8% is Value territory.
- Between 4% & 8% is Fair value,.
- Below <4% is Overvalued.
Alphabet’s current enterprise value is $1.66 Trillion.
Based on its free cash flow of $69.5 Billion, its FCF yield is 4.2%. It is a fair value stock.
Closing argument.
Rounding off on why Google is worth a 2nd chance. (see below)
On 15 Mar 2024, Microsoft CEO said that Google enjoys a competitive edge in generative artificial intelligence due to its trove of data and AI-optimized chips.
It further added that Google is vertically integrated in a manner that provides it with strength and independence at every AI layer from chips to a thriving mobile app store.
Everyone else must rely on partnerships to innovate and compete
This comes about in response to a consultation launched by the European Commission in January 2024 on the level of competition in generative AI.
It is both strange and refreshing to witness Microsoft ceding lead in the AI run when its recent stock price surge is due to its perceived leadership in AI due to its investment in OpenAI (ChatGPT) that is bearing fruits.
Yet here it is while under EU scrutiny, Microsoft is ready to throw both Google and Apple under the bus in order to remain out of the limelight.
On 18 Mar 2024, Bloomberg News reported that Apple is in talks to build Google's Gemini artificial intelligence (AI) engine into the iPhone, citing people familiar with the situation. (see above).
In all fairness, people familiar with the situation also “confirmed” that Apple has also held discussions with the Microsoft, opens new tab-backed OpenAI and has considered using its model.
All this comes about as Apple is preparing new capabilities as part of its upcoming iPhone iOS 18 based on its own homegrown AI models.
And it is seeking a partner tto power generative AI features, including functions for creating images and writing essays based on simple prompts.
It is unlikely that any deal would be announced, least not until June 2024 when Apple hold its annual Worldwide Developers Conference (WDC).
Apple is at the cross road, choose a “wrong” partner will have serious implications and repercussions.
Just for the record, Google has partnered with Samsung, opens new tab in January 2024 to deploy multiple generative AI technology products in its Galaxy S24 series of smartphones.
Need I say more?
- Do you think Google will recover lost grounds and propel higher?
- Do you think Microsoft will choose to partner Microsoft instead of tried & tested Google?
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