Key Takeaways:
- The 2-Minute Valuation Model values Alphabet stock at $230/share in about 2 years.
- That’s a potential 55% upside from today’s price of around $148/share.
- Alphabet is trading near its lowest P/E multiple in the past 5 years, but the stock is still expected to see double-digit annual earnings growth.
- Get accurate financial data on over 100,000 global stocks for free on TIKR >>>
Alphabet (GOOGL) stock has fallen over 20% in the past 3 months, which makes it look like the stock could be on sale today.
As a major player in digital innovation, Alphabet faces both vast opportunities and challenges in a rapidly evolving market landscape.
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What is the 2-Minute Valuation Model?
Three core factors drive a stock’s long-term value:
- Revenue Growth: How big the business becomes.
- Margins: How much the business earns in profit.
- Multiple: How much investors are willing to pay for a business’s earnings.
Our 2-Minute Valuation Model uses a simple formula to value stocks:
Expected Normalized EPS * Forward P/E ratio = Expected Share Price
Revenue growth and margins drive a company’s long-term normalized earnings per share (EPS), and investors can use a stock’s long-term average P/E multiple to get an idea of how the market values a company.
Why Alphabet Looks Undervalued
Forecast
Alphabet is projected to increase normalized earnings per share by a little over 10% annually over the next 3 years.
Analysts estimate that Alphabet’s EPS will reach $11.69 by 2027, so in our valuation, we’ll round it off to $11.50 in expected earnings-per-share for 2027.
This earnings growth is likely to be driven by:
- Continued Expansion in Cloud Computing: As enterprises accelerate digital transformation, Alphabet’s Google Cloud platform is well-positioned for growth.
- Increased Monetization of YouTube: Innovations in advertising and premium content services are expected to boost revenue significantly.
- Growth in Advertising Technologies: Ongoing development of more efficient and targeted advertising solutions will likely enhance profitability.
View Alphabet’s full analyst estimates >>>
Valuation Multiple
Alphabet has traded at an average forward P/E multiple of about 24 over the past 5 years, as shown in the historical P/E chart.
Today, the stock is trading near a 5-year low at just 16.8 times forward earnings:
This makes the stock look cheap today for investors.
We’ll use a conservative forward P/E multiple of 20 for our valuation, which is well below where the stock has traded over the past year, but a touch higher than where the stock trades today.
Fair Value
Using our 2-Minute Valuation Model and applying a conservative approach:
- Conservative 2027 EPS estimate: $11.50
- Conservative forward P/E multiple: 20x
Expected Normalized EPS ($11.50) * Forward P/E ratio (20x) = Expected Share Price ($230)
The 2-year expected share price we would get from this valuation is $230/share.
This presents a substantial potential upside for the stock since the stock today trades at around $148/share.
The stock could have a 55% potential upside over the next 2 years, which means the stock could see a nearly 25% annualized return:
Keep in mind, this is just a valuation exercise, and we don’t know for sure what the stock’s price will be in the future.
Analysts’ Price Target
Today, analysts have an average price target of about $216/share for Alphabet stock today, which means they see over 40% upside for the stock today.
This is a bit lower than the 2-Minute Valuation Model’s target price of $230/share. but still, it’s clear that analysts think the stock is undervalued today:
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Risks to Consider
While our valuation suggests the stock is well undervalued, investors should be aware of several risks:
- Regulatory Challenges: Potential regulatory changes in the U.S. and Europe could restrict operational flexibility and affect profitability.
- Competition in Digital Ads: Intensifying competition from major players like Facebook and Amazon may pressure Alphabet’s ad revenues.
- Economic Downturns: Global economic challenges could lead to reduced advertising spending, impacting overall revenue.
TIKR Takeaway
Alphabet’s diverse portfolio and continuous innovation render it a potentially lucrative long-term investment.
Alphabet stock could deliver 25% annualized returns over the next two years due to the company’s strong projected earnings growth and its low valuation multiple.
Is Alphabet a buy over the next 24 months? Use TIKR to check the stock’s 5-year growth forecasts and other financial metrics to see if the tech stock looks undervalued today.
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Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any stocks mentioned. Thank you for reading, and happy investing!
