Is $GOOG (Alphabet Inc - Google) a good investment after a 30% drop from all time high?

Business Model

Google dominates the search and advertising industry, capturing users' attention through its search engine and digital platforms like YouTube and Google Maps. This allows them to deliver targeted advertising to users, generating significant revenue for the company.

Google has also diversified its revenue streams through its cloud computing services, such as Google Cloud Platform and G Suite. These services provide businesses and individuals with computing resources and software tools on a pay-per-use basis, creating a steady stream of recurring revenue.

In addition, Google invests heavily in research and development to stay ahead of the curve. They continue to innovate and expand their offerings, including exploring new opportunities in areas like autonomous driving and healthcare.

Track Record

Has a good history of successfully growing Revenue and Free Cash Flow.

Balance Sheet

Total Current Assets is more than 2x of Total Current Liabilities:

It means the company has a surplus of liquid assets that can be used to pay off its short-term obligations. So there are no liquidity issues in the short-term.

Total Assets is almost 3x of Total Liabilities:

It indicates that the company is in a strong financial position and is financially stable.

It also has a lot of Total Cash And Short Term Investments relative to Total Debt:

Company can pay off the Total Debt today if they want to.

They basically have a fortress balance sheet.

The main components of a fortress balance sheet

• Have sufficient liquidity at all times (cash on hand)

• Not over levered (don’t have too much debt)

• Well prepared to withstand unexpected shocks while maintaining flexibility should opportunities arise

Valuation

Price to Earnings (P/E) is near the lows using the data for the last 10 years:

For added context, the lowest P/E during Covid at year 2020 was 21x.

If you’re not yet familiar how P/E Ratio works, here’s a post I wrote about it:

Price to Free Cash Flow (P/FCF) is also near the lows using the data for the last 10 years:

The lowest P/FCF during Covid at year 2020 was 23x.

Forecast

Revenue:

Earnings Per Share:

Free Cash Flow is forecasted to grow by +17% in FY23 and 19% in FY24:

DCF

It assumes a 19.5% FCF growth rate and a terminal stage growth rate of 2%.

DCF (conservative)

It assumes 15% FCF growth rate and a terminal stage growth rate of 2%.

Reverse DCF

On the current share price, the market is assuming a 14.88% FCF growth rate.

Other Infos

Ruth Porat, CFO comments on investing for growth on Q4 Earnings Call:

From Q4 & 2022FY Press Release:

Conclusion

Company has a very low bankruptcy risk and based on the current valuation which is near the 10 year lows based on P/E and P/FCF, good growth forecast and DCF and reverse DCF calculations and considering that the company has a fortress balance sheet, I believe that $GOOG offers a good Risk/Reward and is a good long-term investment.

I’m expecting that the company has a good probability to be able to achieve the growth forecast and the market will start paying a higher P/E and P/FCF multiple again once the market sentiment for stocks improves. Company also has lots of optionality because of their fortress balance sheet which can potentially further accelerate their growth moving forward.

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