Alphabet (GOOG, GOOGL) shares have taken a beating following the release of underwhelming financial results for Q4. The company’s free cash flow (FCF) plummeted as capex spending surged. Despite this, there may be a silver lining for GOOGL stock investors.
An estimation pegs the stock’s value at a minimum of $170 per share, potentially even higher. That’s a 21.5% increase from its current level.
Previously, an article on Barchart suggested that GOOGL stock could be valued at $221 per share based on robust Q3 FCF margins. However, the average analyst price target back then was $165 per share, according to AnaChart.com.
During morning trading on Feb. 2, 2024, GOOG stock was at $140.13, a steep drop from its recent high of $153.91 at the end of January.
Concerns Over FCF Results
Alphabet’s lackluster results released on Jan. 30, 2024, showcased a 13% year-over-year revenue increase but a decrease in operating margin from 28% to 27%. However, it’s worth noting that the operating margin was at 25% a year earlier. This suggests some improvement over the past year.
Yet, the real cause for concern stems from Alphabet’s FCF, which dropped to just under $8 billion in Q4 2023, a significant decline from the $16.02 billion in FCF the previous year. This equated to a meager 9.25% FCF margin based on its Q4 revenue of $86.13 billion. Such a dip was largely driven by increased capex spending, hitting $11 billion in Q4 versus $8 billion in Q3 and $7.6 billion a year ago.
Predicting FCF Going Forward
Despite the recent setback, Alphabet managed to generate $69.5 billion in FCF over the last year, translating to an average FCF margin of 22.6% relative to its $307.3 billion in revenue. If this trend continues, the company could potentially yield $77 billion in FCF for 2024, based on analyst estimates of $342.2 billion in revenue for the year.
With a 3.5% FCF yield, Alphabet’s market cap could be valued at $2.139 trillion, 21.5% above the current market cap of $1.76 trillion. This suggests that GOOGL stock could be worth $170 per share, marking a 21.5% increase.
Analysts Maintain Positive Outlook on GOOGL Stock
Amidst the downturn, analysts remain bullish on GOOGL stock. AnaChart.com reveals an average price target of $162.14 per share, indicating a 14.86% increase from the previous day’s close of $141.16.
Rob Sanderson, an analyst at Loop Capital, has displayed exceptional accuracy in forecasting GOOG and GOOGL stock prices, maintaining his price target at $140 per share, as showcased by AnaChart.
Further analysis by Refinitiv shows that 42 analysts have an average price target of $159.83 per share, implying a 13.6% upside from the current price. The consensus indicates that GOOGL stock appears attractively priced based on FCF margins and other analysts’ price targets.
Shorting OTM Puts
Existing shareholders can consider shorting out-of-the-money (OTM) put options as a strategy to generate income while awaiting a potential stock price increase. Notably, despite generating FCF, Alphabet does not pay a dividend, unlike its counterparts such as Microsoft Corp (MSFT) and now Meta Platforms (META).
For instance, the $135 strike price put option expiring on Feb. 23 is trading for $1.01 on the bid side, equating to an immediate yield of 0.75% to the short put investor.
This strategy allows investors to secure $13,500 in cash and/or margin with the brokerage firm, yielding $101 from selling short the put. Given that the strike price is over 3.5% below the current price, it offers some downside protection. Even if the stock falls to this level, the investor will only be obligated to purchase 100 shares at $135 per share, potentially resulting in an average capital loss.
Ultimately, amid the current market conditions, GOOGL stock presents an attractive opportunity for short-put investors.
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