Alphabet: A Bear Market Bargain You Don't Want To Miss

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Warren Buffett is one of the most quoted investors in history, but during scary times like these, two of his quotes are worth highlighting.

Volatility caused by money managers who speculate irrationality with huge sums will offer the true investor more chance to make intelligent investment moves. He can be hurt by such volatility only if he is forced, by either financial or psychological pressures, to sell at untoward times. Warren Buffett

Volatility isn’t the same as fundamental risk. Unless you become a forced seller for emotional or financial reasons, it can’t hurt you can might be your best friend.

That’s especially true if you have discretionary savings to invest because perhaps Buffett’s most famous quote of all is “be greedy when others are fearful.”

YTD chart

I’m not a market timer, and I’m not trying to call the bottom on Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) or any blue-chip bargain.

My job is to point out the fundamental truths of companies and here’s the most fundamental truth of all about this hyper-growth legend.

Bottom Line Up Front: Alphabet Is A Bear Market Bargain You Don’t Want To Miss

There’s no denying that sentiment about tech is terrible right now, no matter how strong the fundamentals.

But that’s precisely when the blue-chip bargains are most bountiful, and just take a look at this.

GOOG Rolling Returns Since 2005

(Source: Portfolio Visualizer Premium)

GOOG has been a very consistent market-beater over the last 17 years, with 17% to 18% average rolling returns.

  • from bear market bottoms returns as strong as 27% annually over the next 10 years
  • 11X return over a decade

What kind of returns can smart long-term investors buying GOOG in this bear market expect in the coming years?

GOOG 2024 Consensus Total Return Potential

(Source: FAST Graphs, FactSet)

(Source: FAST Graphs, FactSet)

If GOOG grows as analysts expect by 2024 it could deliver 60% total returns, or 19% annually.

  • Buffett-like returns from an anti-bubble blue-chip bargain hiding in plain sight

GOOG 2027 Consensus Total Return Potential

(Source: FAST Graphs, FactSet)

(Source: FAST Graphs, FactSet)

By 2027 if GOOG grows as expected (14.1% CAGR) and returns to historical fair value, it could deliver 148% total returns or 17% annually.

  • 4X the S&P 500 consensus

And let’s not forget all the other reasons to buy Alphabet.

Reasons To Potentially Buy GOOG Today

  • 97% quality low-risk 13/13 Ultra SWAN hyper-growth company
  • 100% balance sheet safety score
  • 25% conservatively undervalued (potential very strong buy)
  • Fair Value: $3,070.56 (25.6X earnings)
  • 19.1X forward earnings vs 25.5 to 26.5X historical
  • 11.9X cash-adjusted earnings
  • AA+ stable outlook credit rating = 0.29% 30-year bankruptcy risk
  • 67th industry percentile risk management consensus = above-average
  • 12% to 22% CAGR margin-of-error growth consensus range
  • 4% to 38% individual analyst growth consensus range
  • 16.7% CAGR median growth consensus
  • 5-year consensus total return potential: 18% to 20% CAGR
  • base-case 5-year consensus return potential: 19% CAGR (4X S&P consensus)
  • consensus 12-month total return forecast: 43% (24.8 PE, conservative)
  • Fundamentally Justified 12-Month Returns: 34% CAGR

Or how about this.

Inflation-Adjusted Consensus Return Potential: $1,000 Initial Investment

Time Frame (Years) 7.5% CAGR Inflation-Adjusted S&P Consensus 8.6% Inflation-Adjusted Aristocrat Consensus 14.2% CAGR Inflation-Adjusted GOOG Consensus Difference Between Inflation Adjusted GOOG Consensus And S&P Consensus
5 $1,436.30 $1,511.29 $1,943.21 $506.92
10 $2,062.95 $2,284.01 $3,776.08 $1,713.13
15 $2,963.01 $3,451.81 $7,337.73 $4,374.73
20 $4,255.76 $5,216.70 $14,258.79 $10,003.03
25 $6,112.54 $7,883.98 $27,707.88 $21,595.34
30 $8,779.42 $11,915.01 $53,842.34 $45,062.92

(Source: DK Research Terminal, FactSet)

Analysts think that GOOG could deliver close to 4X inflation-adjusted returns over the next decade and outperform the market by about 83%.

Time Frame (Years) Ratio Aristocrats/S&P Ratio Inflation-Adjusted Aristocrat GOOG Consensus And S&P Consensus
5 1.05 1.35
10 1.11 1.83
15 1.16 2.48
20 1.23 3.35
25 1.29 4.53
30 1.36 6.13

(Source: DK Research Terminal, FactSet)

Over the coming decades, GOOG could continue to run circles around the S&P 500.

Worried that GOOG’s fundamentals might justify its recent 23% crash?

Metric 2021 Growth 2022 Growth Consensus 2023 Growth Consensus 2024 Growth Consensus 2025 Consensus 2026 Consensus

2027 Consensus

Sales 43% 18% 15% 14% 12% 15% 11%
EPS 91% -1% 20% 14% 20% 13% 15%
Operating Cash Flow 43% 23% 15% 12% 28% 1% 11%
Free Cash Flow 59% 18% 20% 15% 32% 15% 16%
EBITDA 69% 35% 15% 16% NA NA NA
EBIT (operating income) 94% 14% 15% 16% NA NA NA

(Source: FAST Graphs, FactSet)

Don’t be because GOOG’s growth thesis remains firmly intact. In fact, in the last week growth estimates have increased slightly while the price has fallen off a cliff.

  • fundamentals going up
  • price going down
  • the definition of a blue-chip bargain you can trust

How great of a potential investment is GOOG today?

GOOG Investment Decision Score

DK

(Source: DK Automated Investment Decision Tool)

For anyone comfortable with its risk profile, GOOG is as close to a perfect growth investment as you can find in today’s market.

  • 25% discount vs 5% market premium = 30% better valuation
  • 67% higher long-term return potential than S&P 500 overtime
  • nearly 3X better risk-adjusted expected return over the next five years

Want to learn more? Then join me as I show you the three reasons why I’m so bullish on GOOG and you should be too.

Reason One: World-Class Quality You Can Trust In Any Market

There are many ways to measure safety and quality and I factor in pretty much all of them.

The Dividend Kings’ overall quality scores are based on a 248-point model that includes:

  • Dividend safety

  • Balance sheet strength

  • Credit ratings

  • Credit default swap medium-term bankruptcy risk data

  • Short and long-term bankruptcy risk

  • Accounting and corporate fraud risk

  • Profitability and business model

  • Growth consensus estimates

  • Management growth guidance

  • Historical earnings growth rates

  • Historical cash flow growth rates

  • Historical dividend growth rates

  • Historical sales growth rates

  • Cost of capital

  • GF Scores
  • Long-term risk-management scores from MSCI, Morningstar, FactSet, S&P, Reuters’/Refinitiv, and Just Capital

  • Management quality

  • Dividend friendly corporate culture/income dependability

  • Long-term total returns (a Ben Graham sign of quality)

  • Analyst consensus long-term return potential

In fact, it includes over 1,000 fundamental metrics including the 12 rating agencies we use to assess fundamental risk.

  • credit and risk management ratings make up 41% of the DK safety and quality model
  • dividend/balance sheet/risk ratings make up 82% of the DK safety and quality model

How do we know that our safety and quality model work well?

During the two worst recessions in 75 years, our safety model 87% of blue-chip dividend cuts, the ultimate baptism by fire for any dividend safety model.

And then there’s the confirmation that our quality ratings are very accurate.

DK Zen Phoenix: Superior Fundamentals Lead To Superior Long-Term Results

Metric US Stocks 191 Real Money DK Phoenix Recs
Great Recession Dividend Growth -25% 0%
Pandemic Dividend Growth -1% 6%
Positive Total Returns Over The Last 10 Years 42% 99.5% (Greatest Investors In History 60% to 80% Over Time)
Lost Money/Went Bankrupt Over The Last 10 Years 47% 0.5%
Outperformed Market Over The Last Decade (290%) 36% 46%
Bankruptcies Over The Last 10 Years 11% 0%
Permanent 70+% Catastrophic Decline Since 1980 44% 0.5%
100+% Total Return Over The Past 10 Years NA 87%
200+% Total Return Over The Past 10 Years NA 66%
300+% Total Return Over The Past 10 Years NA 44%
400+% Total Return Over The Past 10 Years NA 35%
500+% Total Return Over The Past 10 Years NA 27%
600+% Total Return Over The Past 10 Years NA 23%
700+% Total Return Over The Past 10 Years NA 20%
800+% Total Return Over The Past 10 Years NA 18%
900+% Total Return Over The Past 10 Years NA 18%
1000+% Total Return Over The Past 10 Years NA 16%
Sources: Morningstar, JPMorgan, Seeking Alpha

Basically, historical market data confirms that the DK safety and quality model is comprehensive and accurate.

How does Alphabet score on our comprehensive safety and quality models?

GOOG Balance Sheet Safety

Rating Dividend Kings Safety Score (161 Point Safety Model) Approximate Dividend Cut Risk (Average Recession)

Approximate Dividend Cut Risk In Pandemic Level Recession

1 – unsafe 0% to 20% over 4% 16+%
2- below average 21% to 40% over 2% 8% to 16%
3 – average 41% to 60% 2% 4% to 8%
4 – safe 61% to 80% 1% 2% to 4%
5- very safe 81% to 100% 0.5% 1% to 2%
GOOG 100% NA NA
Risk Rating Low-Risk (67th industry percentile risk-management consensus) AA+ Stable outlook credit rating 0.29% 30-year bankruptcy risk 20% OR LESS Max Risk Cap Recommendation

Long-Term Dependability

Company DK Long-Term Dependability Score Interpretation Points
Non-Dependable Companies 21% or below Poor Dependability 1
Low Dependability Companies 22% to 60% Below-Average Dependability 2
S&P 500/Industry Average 61% (61% to 70% range) Average Dependability 3
Above-Average 71% to 80% Very Dependable 4
Very Good 81% or higher Exceptional Dependability 5
GOOG 94% Exceptional Dependability 5

Overall Quality

GOOG Final Score Rating
Safety 100% 5/5 very safe
Business Model 100% 3/3 wide and stable moat
Dependability 94% 5/5 exceptional
Total 97% 13/13 Ultra SWAN
Risk Rating 3/3 Low Risk
20% OR LESS Max Risk Cap Rec

5% Margin of Safety For A Potentially Good Buy

How high quality is GOOG? It’s higher quality than all but 4% of the companies on the DK Master List. How impressive is that?

The DK 500 Master List includes the world’s highest quality companies including:

  • All dividend champions

  • All dividend aristocrats

  • All dividend kings

  • All global aristocrats (such as BTI, ENB, and NVS)

  • All 13/13 Ultra Swans (as close to perfect quality as exists on Wall Street)

  • 49 of the world’s best growth stocks

GOOG is the 18th highest quality company among the world’s best blue-chips.

Why?

Why I Trust Google With My Saving And So Can You

Alphabet was founded in 1998 in Menlo Park, CA, basically Silicon Valley and has proven itself one of the most innovative companies on earth.

Investment Thesis Summary

Alphabet dominates the online search market with Google’s global share above 80%, via which it generates strong revenue growth and cash flow. We expect continuing growth in the firm’s cash flow, as we remain confident that Google will maintain its leadership in the search market. We foresee YouTube contributing more to the firm’s top and bottom lines, and we view investments of some of that cash in moonshots as attractive. Whether they will generate positive returns remains to be seen, but they do present significant upside…

Among the firm’s investment areas, we particularly applaud the efforts to gain a stronger foothold in the fast-growing public cloud market. Google has quickly leveraged the technological expertise it applied to creating and maintaining its private cloud platform to increase its market share in this space, driving additional revenue growth, and creating more operating leverage, which we expect will continue. Regarding Alphabet’s more futuristic projects, although most are not yet generating revenue, the upside is attractive if they succeed, as the firm is targeting newer markets. Alphabet’s autonomous car technology business, Waymo, is a good example: Based on various studies, it may tap into a market valued in the tens of billions of dollars within the next 10-15 years. –Morningstar

  • GOOG’s wide moat in search is virtually impenetrable (only government could break it)
  • GOOG’s strong growth in cloud computing creates a strong growth catalyst

Statista

In 2021 cloud computing grew at 37% while Google Cloud grew at 47%.

  • gaining market share which rose to 10%

Google Cloud Consensus Forecast

Year Google Cloud Sales Google Cloud EBITDA

Google Cloud EBITDA Margins

2020 $13,059 NA NA
2021 $19,206 -$3,099 -16.1%
2022 $26,841 -$1,834 -6.8%
2023 $35,944 -$179 -0.5%
2024 $45,490 $2,654 5.8%
2025 $53,543 NA NA
2026 $57,708 NA NA
2027 $66,192 NA NA
Growth Rate 26.10% NA NA

(Source: FactSet Research Terminal)

Google cloud is growing at 26% per year and is expected to be a $66 billion business by 2027. It’s expected to become profitable in 2024.

Cloud Computing Market Size Worth $1,554.94 Billion by 2030: Grand View Research, Inc.

Grandview research expects the global cloud market to grow about 16% annually through 2030, meaning that AMZN is expected to maintain or even increase its market share.

IOT Analytics

IOT analytics thinks cloud computing will be worth $2 trillion per year within 10 to 20 years, and potentially as much as $10 trillion.

  • IOT estimates that conservatively cloud computing will grow at least 4X in the next 10 to 20 years
  • likely 13X growth
  • potentially 64X growth
  • cloud computing alone is a secular megatrend that Amazon could surf for decades to come

GOOG also has many moonshot projects that could potentially break into brand new growth markets.

  • driverless cars are one example
  • anti-aging is another (two subsidiaries working on a cure for aging)

Moonshots are long-shot investments that could be worth trillions if they pay off.

  • come for the core business
  • stay for the cloud business
  • and moonshots are a cherry on top that could make you fabulously rich

Earnings Update

While YouTube’s ad revenue growth was a bit disappointing, we believe the platform remains well-positioned to further monetize content and viewers, despite increased competition from social networks like Meta, Snap, Twitter, and Pinterest plus newcomers like TikTok. We expect growth will likely begin accelerating in the fourth quarter. Importantly, viewership has not been affected by competitors, as according to the firm, YouTube has maintained its more than 2 billion monthly active users, which we believe will continue to attract content creators. Also, YouTube Shorts, the effort to battle TikTok, is progressing, attracting more than 30 billion views per day, which is 4 times greater than last year. – Morningstar (emphasis added)

I don’t care what the stock price might indicate, GOOG’s earnings were objectively strong to excellent.

  • $70 billion buyback authorization
  • sales growth 23%
  • 20% service growth
  • 44% cloud growth
  • advertising growth 24.3%
  • YouTube Revenue growth 14.4% (off incredible comps)

YouTube Shorts is now averaging over 30 billion daily views. That’s 4x as much as a year ago…

On average, viewers are watching over 700 million hours of YouTube content on televisions every day…

Finally, our Other Bets. This month, Waymo became the first company to run fully autonomous ride-hailing operations in multiple locations simultaneously…

Wing launched its on-demand drone deliveries in the Dallas-Fort Worth area. In the first quarter of 2022, Wing completed over 50,000 commercial deliveries. That’s up more than 3x year-over-year. ” – CEO, Q1 conference call

GOOG remains on track to achieve incredible growth and represents some of the best optionality on Wall Street (possibly even rivaling Amazon).

GOOG Credit Ratings

Rating Agency Credit Rating 30-Year Default/Bankruptcy Risk Chance of Losing 100% Of Your Investment 1 In
S&P AA+ stable 0.29% 344.8
Moody’s Aa2 (AA equivalent) stable 0.51% 196.1
Consensus AA stable 0.40% 250.0

(Source: S&P, Moody’s)

GOOG’s fortress balance sheet means rating agencies estimate a 1 in 250 chance of losing all your money buying this company today.

GOOG Leverage Consensus Forecast

Year Debt/EBITDA Net Debt/EBITDA (3.0 Or Less Safe According To Credit Rating Agencies)

Interest Coverage (8+ Safe)

2020 0.21 -1.81 329.79
2021 0.14 -1.17 65.60
2022 0.13 -1.12 43.31
2023 0.11 -0.92 50.23
2024 0.10 -1.14 56.42
2025 0.08 -0.95 NA
2026 0.07 -1.35 NA
2027 0.06 -1.42 NA
Annualized Change -15.53% -3.39% -35.69%

(Source: FactSet Research Terminal)

  • S&P considers GOOG’s financial strength equal to that of the US treasury

GOOG Balance Sheet Consensus Forecast

Year Total Debt (Millions) Cash Net Debt (Millions) Interest Cost (Millions) EBITDA (Millions) Operating Income (Millions)
2020 $13,932 $26,465 -$122,762 $125 $67,912 $41,224
2021 $14,817 $20,945 -$124,832 $1,200 $106,531 $78,714
2022 $15,499 $38,931 -$136,108 $2,000 $121,422 $86,621
2023 $15,794 $94,485 -$129,089 $2,000 $139,638 $100,450
2024 $16,658 $153,011 -$184,671 $2,100 $161,680 $118,476
2025 $14,817 $275,599 -$174,446 NA $184,347 $136,283
2026 $14,817 $378,386 -$279,580 NA $206,593 $153,461
2027 $14,817 $496,186 -$334,116 NA $235,298 $173,210
Annualized Growth 0.88% 52.00% 15.38% 102.45% 19.43% 22.76%

(Source: FactSet Research Terminal)

GOOG’s debt is expected to remain stable while its net cash (including receivables) is expected to grow 52% per year.

  • almost $500 billion in cash by 2027
  • including buybacks

GOOG Bond Profile

  • $154 billion in liquidity
  • well-staggered bond maturities (no issues refinancing maturing debt)
  • 100% unsecured bonds (maximum financial flexibility)
  • bond investors are so confident in GOOG’s smoke-free future they are willing to lend to it for 38 years at 3.9%
  • average borrowing costs 1.17%
  • -1.3% inflation-adjusted borrowing costs vs 27% cash returns on invested capital

GOOG GF Score: The Newest Addition To The DK Safety And Quality Model

The GF Score is a ranking system that has been found to be closely correlated to the long-term performances of stocks by backtesting from 2006 to 2021. – Gurufocus

GF Score takes five key aspects into consideration. They are:

  • Financial Strength
  • Profitability
  • Growth
  • Valuation
  • Momentum

(Source: Gurufocus Premium)

GOOG’s near-perfect GF score confirms it’s an industry leader in everything that matters.

  • industry-leading profitability
  • industry-leading financial strength
  • industry-leading growth
  • industry-leading value

GOOG Profitability: Wall Street’s Favorite Quality Proxy

(Source: Gurufocus Premium)

Historical profitability is in the top 10% of peers and in recent years it’s become even better.

GOOG Trailing 12-Month Profitability Vs Peers

Metric Industry Percentile Major Interactive Media Companies More Profitable Than GOOG (Out Of 607)
Operating Margin 46.75 323
Net Margin 87.61 75
Return On Equity 85.59 87
Return On Assets 89.46 64
Returns On Invested Capital 87.13 607
Return On Capital 66.10 206
Return On Capital Employed 88.08 607
Average 78.67 129

(Source: Gurufocus Premium)

In the last year, GOOG’s profitability was in the top 21% of its peers.

GOOG Profit Margin Consensus Forecast

Year FCF Margin EBITDA Margin EBIT (Operating) Margin Net Margin Return On Capital Expansion

Return On Capital Forecast

2020 23.5% 37.2% 22.6% 22.1% 1.01
2021 26.0% 41.3% 30.6% 29.5% TTM ROC 82.14%
2022 26.6% 40.6% 29.0% 24.9% Latest ROC 66.79%
2023 27.0% 40.5% 29.1% 25.3% 2027 ROC 83.06%
2024 28.2% 41.3% 30.2% 25.6% 2027 ROC 67.54%
2025 30.8% 42.0% 31.1% 27.5% Average 75.30%
2026 29.7% 40.8% 30.3% 26.1% Industry Median 14.87%
2027 30.1% 42.0% 30.9% 26.5% GOOG/Industry Median 5.06
Annualized Growth 3.61% 1.74% 4.58% 2.66% Vs S&P 5.16
Annualized Growth (Ignoring Pandemic) 2.46% 0.25% 0.19% -1.77%

(Source: FactSet Research Terminal)

GOOG’s margins are expected to remain stable or improve in the coming years, including 30% FCF margins.

  • return on capital = annual pre-tax profit/all the money it takes to run the business
  • Joel Greenblatt’s gold standard proxy for quality and moatiness

Returns on capital are expected to remain stable at 5X its industry peers and over 5X that of the S&P 500.

And this improving profitability is despite some truly incredible growth spending.

Speaking of growth spending, there are 900 billion reasons to love Alphabet.

Reason Two: Exceptional Growth Prospects For Years To Come

Some people are worried about GOOG’s growth prospects. But management disagrees and is putting its money where their mouth is.

GOOG Growth Spending Consensus Forecast

Year SG&A (Selling, General, Administrative) R&D Capex Total Growth Spending Sales Growth Spending/Sales
2021 $36,422 $31,562 $24,640 $92,624 $257,637 35.95%
2022 $43,357 $39,272 $32,729 $115,358 $298,905 38.59%
2023 $49,247 $45,480 $34,609 $129,336 $344,694 37.52%
2024 $53,631 $50,747 $37,793 $142,171 $391,798 36.29%
2025 $57,248 $53,256 $40,836 $151,340 $438,634 34.50%
2026 $62,728 $58,589 $36,658 $157,975 $506,357 31.20%
2027 $66,804 $62,587 $35,786 $165,177 $560,626 29.46%
Annualized Growth 10.64% 12.09% 6.42% 10.12% 13.84% -3.26%
Total Spending 2022 To 2027 $333,015 $309,931 $218,411 $861,357 $2,541,014 33.90%

(Source: FactSet Research Terminal)

GOOG’s growth spending in 2021 was $93 billion.

It’s growing at 10% annually and is expected to reach $165 billion by 2027.

Over the next five years, GOOG is expected to spend $861 billion on growth, 34% of its $2.5 trillion in consensus sales.

  • GOOG is expected to spend more on growth in the next 5 years than the US government ($1.2 trillion 10-year infrastructure bill)

GOOG’s R&D budget in 2021 alone was larger than the GDP of all but 97 countries on earth.

  • by 2027 all but 72 countries

GOOG Medium-Term Growth Consensus Forecast

Year Sales Free Cash Flow EBITDA EBIT (Operating Income) Net Income
2020 $182,527 $42,843 $67,912 $41,224 $40,269
2021 $257,637 $67,012 $106,531 $78,714 $76,033
2022 $298,905 $79,489 $121,422 $86,621 $74,549
2023 $344,694 $92,999 $139,638 $100,450 $87,321
2024 $391,798 $110,648 $161,680 $118,476 $100,169
2025 $438,634 $135,097 $184,347 $136,283 $120,614
2026 $506,357 $150,253 $206,593 $153,461 $132,124
2027 $560,626 $168,684 $235,298 $173,210 $148,683
Annualized Growth 17.39% 21.63% 19.43% 22.76% 20.52%
Annualized Growth (Ignoring Pandemic) 13.84% 16.63% 14.12% 14.05% 11.83%

(Source: FactSet Research Terminal)

GOOG is growing like a weed, and at a solid 12% to 17% per year even ignoring the Pandemic boom.

  • $169 billion in annual free cash flow by 2027

GOOG Buyback Potential Consensus Forecast

Year Dividend Consensus FCF/Share Consensus Retained (Post-Dividend) Free Cash Flow Buyback Potential Debt Repayment Potential
2022 $0.00 $118.40 $78,026 5.17% 526.6%
2023 $0.00 $144.06 $94,936 6.29% 612.5%
2024 $0.00 $168.20 $110,844 7.35% 715.2%
2025 $0.00 $222.46 $146,601 9.72% 928.2%
2026 $0.00 $255.14 $168,137 11.15% 1009.3%
2027 $0.00 $295.76 $194,906 12.92% 1315.4%
Total 2022 Through 2027 $0.00 $1,204.02 $793,449.18 52.61% 5119.36%
Annualized Rate NA 20.09% 20.09% 20.09% 20.09%

(Source: FactSet Research Terminal)

Almost $700 billion in retained cash flow over the next five years.

Enough to pay off 51x their debt or buy back 52% of the stock at current valuations.

GOOG Consensus Buyback Forecast

Year Consensus Buybacks ($ Millions) % Of Shares (At Current Valuations) Market Cap
2022 $46,252.0 3.1% $1,508,186
2023 $48,300.0 3.2% $1,508,186
2024 $62,608.0 4.2% $1,508,186
2025 $81,058.0 5.4% $1,508,186
2026 $90,152.0 6.0% $1,508,186
2027 $101,210.0 6.7% $1,508,186
Total 2022-2024 $429,580.00 28.5% $1,508,186
Annualized Rate 5.44% Average Annual Buybacks $71,596.67

(Source: FactSet Research Terminal)

GOOG is expected to buy back $430 billion in stock in the next five years, 28.5% of shares at current valuations, or over 5% per year.

  • and that’s after investing nearly $900 billion into growth
  • $363 billion in post-buyback free cash flow
  • GOOG will one day pay a dividend, it’s a long-term mathematical certainty if it grows as expected

We repurchased a total of $52 billion of our Class A and Class C shares in the last 12 months…Our Board has authorized the repurchase of up to an additional $70 billion of our Class A and Class C shares in a manner that’s in the best interest of the company and its stockholders.” – CFO, Q1 conference call

GOOG started buying back stock only recently and if they deliver the buybacks that analysts expect they could generate incredible growth in intrinsic value.

Time Frame (Years) Net Buyback Rate Shares Remaining Net Shares Repurchased Each Share You Own Is Worth X Times More (Not Including Future Growth And Dividends)
5 5.4% 75.60% 24.40% 1.32
10 5.4% 57.16% 42.84% 1.75
15 5.4% 43.21% 56.79% 2.31
20 5.4% 32.67% 67.33% 3.06
25 5.4% 24.70% 75.30% 4.05
30 5.4% 18.67% 81.33% 5.36

(Source: FactSet Research Terminal)

Not counting any future EPS, FCF or dividend growth, each share of GOOG you own today could be worth 5.36X more purely from buybacks if analysts are right.

GOOG Long-Term Growth Outlook

(Source: FactSet Research Terminal)

  • 14.1% to 20.6% CAGR consensus range (five sources)
  • 4% to 38% (individual analyst range)
  • 16.7% median growth consensus from all 50 analysts

FAST Graphs

FAST Graphs

Smoothing for outliers historical margins of error are 5% to the upside and 10% to the downside.

  • 12% to 22% CAGR historical margin-of-error adjusted growth consensus range
  • 70% statistical probability that GOOG grows at 12% to 22% over time

GOOG is expected to keep growing at the same rate as in the last 10 years.

And all this incredible quality, safety, and innovative hyper-growth can be yours for a bargain price that you have to see to believe.

Reason Three: A Wonderful Company At A Wonderful Price

For the last 17 years, billions of investors have, outside of bear markets and bubbles, paid 25.5X to 26.5X earnings for GOOG.

  • 25.62X is the most common market-determined fair value PE
  • 91% probability that GOOG is worth approximately 25.62X earnings
Metric Historical Fair Value Multiples (all years) 2022 2023 2024 2025 12-Month Forward Fair Value
Earnings 25.62 $2,879.18 $3,432.06 $3,936.77 $4,704.60
Average $2,879.18 $3,432.06 $3,936.77 $4,704.60 $3,070.56
Current Price $2,325.84

Discount To Fair Value

19.22% 32.23% 40.92% 50.56% 24.25%
Upside To Fair Value 23.79% 47.56% 69.26% 102.28% 32.02%
2022 EPS 2023 EPS 2023 Weighted EPS 12-Month Forward PE 12-Month Average Fair Value Forward PE

Current Forward PE

$112.38 $133.96 $46.37 $119.85 25.6 19.4

GOOG is historically valued at about 25.6X earnings and today trades at 19.4.

But don’t forget about that mountain of cash.

  • 12.0X cash-adjusted earnings vs a 13-year median of 20.3
  • GOOG is potentially as much as 41% undervalued

Analyst Median 12-Month Price Target

Morningstar Fair Value Estimate

$3,314.27 (24.7 PE) $3,600 (30.1 PE)

Discount To Price Target (Not A Fair Value Estimate)

Discount To Fair Value

29.82% 35.39%

Upside To Price Target (Not Including Dividend)

Upside To Fair Value (Not Including Dividend)

42.50% 54.78%

Analysts expect GOOG to deliver 43% total returns in the next year and Morningstar thinks its 35% undervalued.

  • factoring in all its cash that’s not an unreasonable valuation

Of course, I don’t care about 12-month return forecasts. I want to know whether or not the margin of safety compensates you sufficiently for the company’s risk profile.

Rating Margin Of Safety For Medium-Risk 13/13 Ultra SWAN quality companies 2022 Price 2023 Price

12-Month Forward Fair Value

Potentially Reasonable Buy 0% $2,879.18 $3,432.06 $3,070.56
Potentially Good Buy 5% $2,735.22 $3,260.45 $2,917.03
Potentially Strong Buy 15% $2,447.30 $2,917.25 $2,609.97
Potentially Very Strong Buy 25% $2,051.41 $2,574.04 $2,302.92
Potentially Ultra-Value Buy 35% $1,871.46 $2,230.84 $1,995.86
Currently $2,327.94 19.15% 32.17% 24.19%
Upside To Fair Value (Not Including Dividends) 23.68% 47.43% 31.90%

For anyone comfortable with its risk profile GOOG is a potentially strong buy and less than 1% away from being a very strong buy.

Risk Profile: Why Alphabet Isn’t Right For Everyone

There are no risk-free companies and no company is right for everyone. You have to be comfortable with the fundamental risk profile.

What Could Cause GOOG’s Investment Thesis To Break

There are no risk-free companies and no company is right for everyone. You have to be comfortable with the fundamental risk profile.

  • safety falls to 40% or less
  • balance sheet collapses (highly unlikely, more cash than debt)
  • Government regulations are the biggest threat to its core business moat
  • competition from the likes of Tik Tok is the biggest risk to YouTube
  • growth outlook falls to less than 10% for seven years
  • GOOG’s role in my portfolio is to deliver long-term 10+% returns with minimal fundamental risk

How long it takes for a company’s investment thesis to break depends on the quality of the company.

Quality

Years For The Thesis To Break Entirely

Below-Average 1
Average 2
Above-Average 3
Blue-Chip 4
SWAN 5
Super SWAN 6
Ultra SWAN 7
100% Quality Companies (LOW and MA) 8

These are my personal rule of thumb for when to sell a stock if the investment thesis has broken.

GOOG is highly unlikely to suffer such catastrophic declines in fundamentals.

GOOG Risk Profile Summary

  • political/regulator risk (anti-trust threats)
  • market share risk (from major rivals like AMZN whose ads are 4X as effective as GOOG’s)
  • disruption risk (web 3.0 potentially will allow everyone to own their data and monetize it, forcing GOOG to pay part of its current profits on data to users)
  • M&A execution risk (lots of small bolt-on acquisitions, and a lack of large M&A opportunities due to regulatory concerns over anti-trust)
  • talent retention risk (tightest job market in over 50 years)
  • currency risk (as sales become more international)
  • cyber-security risk: hackers and ransomware

Cost per click is expected to start falling in 2023, likely due to competitive pressure from Amazon.

  • Strong growth in volume is expected to drive 14% revenue growth through 2027

How do we quantify, monitor, and track such a complex risk profile? By doing what big institutions do.

Long-Term Risk Analysis: How Large Institutions Measure Total Risk

  • see the risk section of this video to get an in-depth view (and link to two reports) of how DK and big institutions measure long-term risk management by companies

GOOG Long-Term Risk Management Consensus ​

Rating Agency Industry Percentile

Rating Agency Classification

MSCI 37 Metric Model 63.0%

BBB, Average, Negative Trend

Morningstar/Sustainalytics 20 Metric Model 38.8%

24.3/100 Medium-Risk

Reuters’/Refinitiv 500+ Metric Model 92.7% Excellent
S&P 1,000+ Metric Model 47.0%

Average, Positive Trend

Just Capital 19 Metric Model 100.0%

#1 Industry Leader

FactSet 30.0%

Below-Average, Stable Trend

Morningstar Global Percentile (All 15,000 Rated Companies) 60.2% Average
Just Capital Global Percentile (All 954 Rated US Companies) 100.0%

#1 Company In America

Consensus 67%

Low-Risk, Above-Average Risk-Management, Stable Trend,

(Sources: MSCI, Morningstar, S&P, FactSet)

GOOG’s Long-Term Risk Management Is The 211th Best In The Master List (58th Percentile)

Classification Average Consensus LT Risk-Management Industry Percentile

Risk-Management Rating

S&P Global (SPGI) #1 Risk Management In The Master List 94 Exceptional
Strong ESG Stocks 78

Good – Bordering On Very Good

Foreign Dividend Stocks 75 Good
Ultra SWANs 71 Good
Low Volatility Stocks 68 Above-Average
Alphabet 67 Above-Average
Dividend Aristocrats 67 Above-Average
Dividend Kings 63 Above-Average
Master List average 62 Above-Average
Hyper-Growth stocks 61 Above-Average
Monthly Dividend Stocks 60 Above-Average
Dividend Champions 57 Average

(Source: DK Research Terminal)

GOOG’s risk-management consensus is in the top 42% of the world’s highest quality companies and similar to that of such other companies as

  • PPG Industries (PPG) – dividend aristocrat
  • Hormel Foods (HRL) – dividend king
  • Enterprise Products Partners (uses K-1 tax form) (EPD)
  • Abbott Labs (ABT) – dividend king
  • TC Energy (TRP)
  • Magellan Midstream Partners (uses K-1) (MMP)
  • Royal Bank of Canada (RY)

The bottom line is that all companies have risks, and GOOG is above-average at managing theirs.

How We Monitor GOOG’s Risk Profile

  • 50 analysts
  • 2 credit rating agencies
  • 7 total risk rating agencies
  • 57 experts who collectively know this business better than anyone other than management

When the facts change, I change my mind. What do you do sir?” – John Maynard Keynes

There are no sacred cows at iREIT or Dividend Kings. Wherever the fundamentals lead we always follow. That’s the essence of disciplined financial science, the math behind retiring rich and staying rich in retirement.

Bottom Line: Alphabet Is A Bear Market Bargain You Don’t Want To Miss

I can’t tell you when the market will stop falling, though I can tell you where fundamentals, technicals, and market history say might be a bottom.

  • about 7% lower
  • at -20% on the S&P
  • and -30% on the Nasdaq

In other words, given the state of the economy (strong), and corporate earnings (growing steadily) the worst of this bear market is likely behind us.

  • Citi Group, JPMorgan, and Morgan Stanley all agree that we’re likely nearing the bottom of this bear market

What does that mean for smart long-term investors such as yourself? To paraphrase Casablanca:

If the Alphabet leaves the ground after this bear market, and you haven’t bought some, you’ll regret it. Maybe not today. Maybe not tomorrow, but soon and for the rest of your life.

Why?

  • GOOG is one of the world’s safest, most dependable, and highest quality hyper-growth companies
  • 16.7% CAGR long-term consensus return potential (more than aristocrats, S&P, and Nasdaq)
  • 25% discount to fair value = potential very strong buy
  • 12.0X cash-adjusted PE vs 20.3 13-year median
  • 148% total return potential over the next five years, 4X the S&P 500
  • about 3X the risk-adjusted expected returns of the S&P 500 over the next five years
  • eventually, it will pay a dividend and a very safe one at that

I’m not a market timer, just a fundamentals focused disciplined financial scientist.

And here’s what I can say with near absolute certainty.

Alphabet is a wonderful company at a wonderful price.

And anyone buying today is likely to feel like a stock market genius in 5+ years.

Or to put it another way, Alphabet is a bear market bargain you don’t want to miss.