Alphabet is a value stock right now, this investor says

Investors with a stake in Big Tech are likely to see January make its exit, as the month was less than kind to FAANG-type stocks across the board, with growth in retreat and investors looking for value stocks amid the rising interest rate environment. But when it comes to the American tech giants like Apple, Microsoft, Facebook and the rest, the growth/value distinction hasn’t really worked for years now since most of these companies are gushing money now, not later, even as their prospects for bigger top and bottom lines show no signs of abating. 

Such is the case for Google and parent company Alphabet (Alphabet Stock Quote, Charts, News, Analysts, Financials NASDAQ:GOOGL) which keeps delivering quarter after quarter and is expected to deliver huge profits again in its fourth quarter due on Tuesday. 

Now, with the stock off about eight per cent from recent highs, GOOGL looks even better, says portfolio manager Lorne Steinberg, who argues that Alphabet is clearly in value territory at the moment.

“Here we are in the midst of a tech selloff and all of a sudden Alphabet is a value stock,” said Steinberg, president of Lorne Steinberg Wealth Management, speaking on BNN Bloomberg on Thursday.

“There are very few companies with revenues of over $200 billion who are growing their top and bottom lines by 15 to 20 per cent per year. They’re sitting with over $100 billion of net cash. And you can buy this company for 20x earnings,” he said.

Alphabet delivered third quarter earnings in late October where it beat analysts’ estimates for top and bottom lines, coming in with revenue up a full 41 per cent year-over-year to $65.12 billion and EPS of $27.99 per share compared to $16.40 per share a year earlier. Analysts had on average expected revenue of $63.34 billion and earnings of $23.48 per share.

By segment, YouTube ad revenue was $7.205 billion compared to $5.037 billion for last year’s Q3, while ad revenue on Google was a huge $53.130 billion compared to $37.095 billion a year ago. Google’s cloud division also saw big revenue growth, coming in at $4.99 billion for a 45 per cent growth trajectory.

In his comments on the quarter, Alphabet CEO Sundar Pichai spoke of how Google’s R&D over the years have resulted in a better search product, mentioning Google’s AI capabilities as well as Google Lens which allows people to search by both images and words.

“Search remains the heart of what we do. We have made remarkable advances over the past 23 years that benefits Search and related products like Google Assistant, which just celebrated five years,” said Pichai in Alphabet’s third quarter conference call on October 26.

“Our revenue performance in the third quarter reflects continued broad-based strength in advertiser spend and elevated consumer online activity as well as a strong contribution from Google Cloud,” said Alphabet CFO Ruth Porat in the conference call.

For Steinberg, Alphabet’s dominance in online advertising makes the stock a no-brainer, especially with the company still poised for growth in upcoming years.

“We expect earnings to at least double over the next five years. What a compelling purchase in this environment to buy just the best in the world,” Steinberg said.