Alphabet (GOOG, GOOGL) stock has tumbled after the company released tepid results for Q4. Its free cash flow (FCF) was significantly lower after its capex spending rose. Nevertheless, GOOGL stock could still be cheap here. 

I estimate it's worth at least $170 per share, and possibly much more. That is 21.5% more than today.

In fact, in my last Barchart article, I suggested that GOOGL stock could be worth $221 per share based on its high Q3 FCF margins. However, the average analyst price target target at the time was $165 per share, according to AnaChart.com.

In morning trading on Feb. 2, 2024, GOOG stock is now at $140.13. This is off of its recent high of $153.91 at the end of January.

Tepid FCF Results

But then Alphabet released unimpressive results on Jan. 30, 2024. Although revenue was up 13% YoY, its operating margin dipped to 27% from 28% in the prior quarter. 

However, to its credit, Alphabet's year-earlier operating margin was lower at 25%. So, in the past year, Alphabet has still shown some progress.

However, more importantly, Alphabet's free cash flow (FCF) dipped to just under $8 billion in Q4 2023. That was much lower than the $16.02 billion in FCF it made last year. And in Q3 it generated $22.6 billion in FCF.

This represents a significantly lower FCF margin in Q4. For example, based on its $86.13 billion in revenue, the FCF margin in Q4 was just 9.25%. This was significantly lower than the 29.5% FCF margin in Q3 (i.e., $22.6 b/$76.693 revenue).

Moreover, last year in Q4 its FCF margin was much higher at 21% (i.e., $16b/$76.05b) compared to just 9.25% this past quarter. This was partly due to higher capex spending in the last quarter. For example, Alphabet spent $11 billion in Q4, compared to $8 billion in Q3 and $7.6 billion a year ago.

Forecasting FCF Going Forward

Nevertheless, over the last year, Alphabet generated $69.5 billion in FCF. Compared to $307.3 billion in revenue, that works out to an average FCF margin of 22.6%.

If we assume this continues over the next 12 months, Alphabet could generate $77 billion in FCF. This is based on analysts' estimates of $342.2 billion in revenue in 2024. Even using a 22% FCF margin we can forecast $75.3 billion in FCF for 2024. 

Using a 3.5% FCF yield (the same as a 28.4x multiple), this means that Alphabet's market cap could be worth $2,139 billion (i.e., 30 x $75.3b). That is still 21.5% over today's market cap of $1.76 trillion. 

This implies that GOOGL stock could be worth $170 per share, or 21.5% higher.

Analysts Still Like GOOGL Stock

Analysts are still positive on GOOGL stock. For example, AnaChart.com shows that its survey of sell-side 42 analysts is an average price target of $162.14 per share, or 14.86% higher than yesterday's close of $141.16.

One analyst, Rob Sanderson, of Loop Capital, has been particularly good at forecasting GOOG and GOOGL stock. AnaChart shows that he has a particularly high performance compared to other analysts in forecasting the stock price. So far, he has held his price target at $140 per share.

Refinitiv's survey of 42 analysts, as seen by Yahoo! Finance, shows that the average price target is $159.83 per share. This is still 13.6% over today's price.

The bottom line is that GOOGL stock looks cheap here, both based on its FCF margins and also based on other analysts' average price targets.

Shorting OTM Puts

One way existing shareholders can play this is to short out-of-the-money (OTM) put options. This will allow them to make income while waiting for the stock to rise. After all, Alphabet still does not pay a dividend, even though it generates FCF and its peers like Microsoft Corp (MSFT) and now Meta Platforms (META) also pay dividends.

For example, the Feb. 23 expiry period shows that the $135 strike price put option trades for $1.01 on the bid side. That represents an immediate yield of 0.75% to the short put investor.

In other words, after securing $13,500 in cash and/or margin with the brokerage firm, an investor can make $101 selling short this put. That is done by entering an order to “Sell to Open” 1 put contract at $135.00. 
Since this strike price is over 3.5% below today's price, it provides some downside protection. But even if the stock falls to this level, the investor is only obligated to buy 100 shares at $135 per share. That may or may not result in an average capital loss for the investor.

The bottom line is that GOOGL stock looks attractive here, especially for the short-put investor.

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On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.