We don’t often see the world’s best companies trade at a 50% discount to historic valuation despite beating estimates quarter after quarter… and we don’t often see investor sentiment imploding to a 30-year low, asserts Adam Johnson, editor of Bullseye Brief.
The mood on Wall Street is as depressed as I’ve ever seen it, arguably worse than in 2008 and even 2000. The combined assault of inflation, rate hikes, supply outages, war in Europe and a Covid crisis that just won’t go away has left investors at wit’s end.
Leading stocks have fallen more than many thought possible, and even good news seems to be greeted with waves of selling. I don’t know how long this morass can last, but I have learned that extremes often produce extremely compelling opportunities.
Too many high quality stocks have fallen too far, and this week I’m focusing on one in particular. Staring us in the face is one world’s biggest and best companies, trading 25% from its high and 50% below its historic valuation, despite consistently beating estimates and growing 18%. Keep it simple: quality on sale.
Alphabet (GOOGL) completely dominates the digital landscape, ranking #1 globally in Search and Advertising with 92% and 28% marketshare respectively. No other company touches more people every day than Google, and despite it’s size, profits rise double-digits year after year. In the pantheon of World’s Best Companies, Google stands apart.
Incredibly, the stock has fallen 25% from its high and now trades inline with the S&P 500 Index at 19 times earnings, compared to 29x over the past decade. I think the world’s third largest and second fastest growing mega-cap deserves a premium valuation. It’s also an excellent business I want to own.
Expanding connectivity and perpetual population growth provide ample runway for Google revenues to continue rising, while its ground-breaking Labs subsidiary creates optionality on new technologies like drone delivery and autonomous taxis. Google is high quality, highly profitable and highly attractive at its current valuation.
While 2021 accelerated ad spending, and may even have brought forward (cannibalized) a percentage of 2022 ad budgets, Q1 profits still rose 15% YoY. That’s barley below the long term average, and even though management suggests growth could slow in the second half given tough comps versus Covid, the 53 analysts covering Google are unanimous in their assessment. All rate Google a "buy" and are modeling 18% growth through 2025.
The stock is cheap — currently trading 19 times forward earnings vs. 29x over the past ten years. If valuation simply reinflates to this long-term average, the stock will rise to $3,600. I also recognize this re-rating could take time.
If I apply the 29 multiple to estimated 2025 earnings of $203 (which assumes steady 18% YoY growth) and discount back to the present at 5%, I arrive at $5,000. Averaging these two prices yields a target of $4,300. I believe buying GOOGL here represents an excellent entry point.
