The Best Alphabet Likely to Be Worth Much More Next Year
GOOG shares could be worth up to 41% more over the next two years if profits and margins increase
Alphabet (NASDAQ: GOOG, NASDAQ: GOOGL) reported 3.9% lower operating income and 3.6% lower pre-tax income for Q1 2020. But GOOG’s shares have risen even higher and are now more expensive. The stock now trades at nearly 32 times its 2020 earnings outlook, according to estimates by Seeking Alpha.
However, those same estimates show a big increase in earnings set for 2021. Earnings per share (EPS) can reach $ 56.56, up to $ 12.26, or nearly 27.7% expected for 2021. That puts stocks at only 25 times the earnings of the future of 2021.
How high could GOOG Stock go up?
I say “only”, because this is a low price-to-Earnings (P / E) ratio for GOOG shares. For example, last year Alphabet earned $ 34.66 per fully diluted share on a normalized basis. The stock ended the year at $ 1,337.02 per share. This gave the stock a price-to-Earnings ratio of 38.6 times.
Thus, using that P / E ratio to the projected 2021 EPS of go 56.56, GOOG’s shares could reach a price of $ 2,183.22 per share. That represents a potential gain as of today (May 22, 2020), with the stock at 5 1,410.42, up 55%.
But will the stock really be worth 38.6 times earnings? Maybe, but margins would have to increase to the same levels as in 2019. Last year, the company made a net income margin of more than 21.2%. This is higher than its most recent quarterly net income margin of just 16.6%.
Adjusting stock valuation for margins
Without those higher margins, it is doubtful that GOOG’s shares will achieve the highest P / E ratings of analysts. Right now, analysts who collectively predict $ 56.56 per share in EPS for 2021, are assuming a net income margin of about 19%. That’s about half the current margin on last year’s margin.
At this time, GOOG is trading at 31.8 x 2002 expected earnings. Therefore, I suspect that the stock will trade for half the increase in the P / E ratio to its 2021 ratio of 38.6 times. That puts its value at 35.x times your expected earnings in 2021 of $ 56.56 per share, or o 1,990.91 per share.
Adjusting for expected margins, GOOG’s shares are worth approximately 41% more if the shares meet their margin and EPS targets in 2021.
Analysts look uniformly bullish on GOOG shares
Barron just published an article about how bullish analysts are on Alphabet. The article says that Wall Street expects many years of double-digit earnings growth for the company.
The thesis is that more companies will depend on digital advertising for their market and growth drivers. As I noted in my article, Google and Facebook (NASDAQ: FB) dominate this part of the advertising market. Digital ads are taking over the entire advertising market.
Barron referred to a Citigroup analyst projecting earnings of $ 55.43 per share in 2021, including 20% growth in revenue. The analyst then projects EPS of $ 72.28 per share in 2022.
Even using a lower P / E ratio of only 32 times EPS, that scenario still projects a stock price of $ 2,312 by 2022. That represents a potential gain of 64% for GOOG shares. It also gives Alphabet a massive market value of.1.58 trillion.
Should you buy GOOG shares now?
Betting on Alphabet is almost like betting on a rebound in the world economy. This is because as companies recover in their business, and as there is more consumer discretionary revenue, the propensity of companies using advertising increases. This relates directly to the digital advertising business, which is also gaining market share.
I suspect that an investment in GOOG shares will probably do well in the coming years, despite high price-to-earnings valuations.
Recently, a famous hedge fund investor, Seth Klarman, who heads Baupost Group, decided to make investments of $ 350 million in both Alphabet and Facebook. This is a great vote of confidence in both companies. He probably recognizes that the shares are at bargain prices compared to their future valuations.
I suspect that investors who follow his example in GOOG stocks will also make money.