1 FAANG Stock to Scoop Up

Top FAANG Stock to Buy: The FAANG stocks represent five of the most successful companies in American history. These five technology stocks have built up enormous platforms used by billions of consumers and produced massive gains for investors over their histories. 

 

One stock, however, stands out as the most logical buy of the five: Alphabet (NASDAQ:GOOGL).

 

Here’s why it’s the FAANG stock to buy while prices remain low.

In Q1, Alphabet generated $68.0 billion in overall revenue, narrowly missing the analyst consensus estimate of $68.2 billion.

 

Revenue from Google’s core advertising business grew by 22 percent, reaching $54.7 billion. YouTube revenue missed analyst expectations at just $6.9 billion, compared to a projection of $7.5 billion.

 

Google Cloud’s Q1 revenue was $5.8 billion, compared to expectations of $5.7 billion. This represented a 44 percent year-over-year increase for the cloud computing segment.

Alphabet also had a miss on the earnings side, though it was somewhat larger than the revenue miss. Analysts had predicted EPS of $25.65 for the quarter, while Alphabet ultimately reported $24.62. Net income, however, rose by a staggering 162 percent.

 

While Alphabet did not meet analyst expectations for the most recent quarter, there are actually several positive points in its reporting.

 

To begin with, the 44 percent gain in Google Cloud demonstrates that the company’s cloud computing segment still has ample steam behind its growth.

 

YouTube’s Shorts feature, designed to compete with the increasingly popular video platform TikTok, doubled its views from the previous quarter to over 30 billion. Going forward, the Shorts feature could drive improved revenue growth at YouTube and allow it to remain relevant as consumer preferences shift to shorter video formats.

 

Although revenue growth declined year-over-year, it’s also important to keep context in mind.

 

In Q1 2021, tech companies like Alphabet were seeing exceptional growth due to pandemic pressures. Between the first quarters of 2020 and 2021, Alphabet revenues rose from $41.2 billion to $56.9 billion. This kind of growth was unlikely to continue as pandemic pressures cooled. The fact that Alphabet is still delivering double-digit growth in this context, therefore, is a sign that the business is still quite strong.

 

Google’s Q1 numbers also reflected the sudden and unexpected halting of most of its operations in Russia and a drastic slowdown in operations throughout Europe as a whole. While these problems may not ease immediately, they likely represent a one-time operational loss.

 

European revenues should regain steam as fears of the war between Russia and Ukraine subside. The loss of Russian revenue streams may be a long-term factor, but the worst of the damage from it has already been done.

 

Cash is one of Alphabet’s most positive traits. Between cash, equivalents and short-term investments, Alphabet is sitting on a stockpile of more than $121 billion that could be invested into its existing businesses or used to acquire new subsidiaries.

 

Much of this will likely be used to build new data centers, particularly those used to drive ongoing Google Cloud growth. The company plans to spend over $7 billion on data centers in 2022, with more investments presumably to come to support its growing data storage needs.

 

Beyond its cash and investment reserve, Alphabet has also achieved a truly staggering free cash flow.

 

In 2021, Alphabet generated $67 billion in free cash flow. This was up 56.4 percent from 2020, continuing a trend of double-digit increases that goes back to 2018.

 

To date, Alphabet has sold off by 22.7 percent this year. Between this massive selloff, ongoing double-digit growth and its enormous free cash flow, there’s a strong possibility that Alphabet is undervalued by a substantial margin at its current price.

 

The first clue for an undervaluation is the stock’s present P/E ratio, which stands at 20.2. Over the last five years, the stock’s ratio has averaged 32.4, placing the current ratio at just 62 percent of the average.

 

Although P/E ratios across the tech sector are compressing in order to price in slower future growth at the moment, this massive contraction on Alphabet’s part is likely an overcorrection.

 

Analyst price targets also seem to confirm the view that Alphabet is trading below its proper valuation. On a 12-month horizon, Google has a median target price of $3,200, 42.7 percent higher than the current price of $2,242.33.

 

Alphabet’s cash flow, however, suggests that the fair value for the stock is actually substantially higher than the median analyst estimate for the coming year.

 

When the company’s growth rate and cash flows are used to produce a discounted cash flow forecast, it becomes clear that Alphabet is trading at a very steep discount today. The most likely fair value for the stock is around $3,800, nearly 70 percent above its current price.

 

Alphabet appears to be a strong buy at today’s prices. For growth investors, the company’s expanding portfolio of smaller business lines and its cloud computing segment offer the prospect of double-digit forward growth. Value investors, meanwhile, have the opportunity to scoop up a stock that is trading far below its probable intrinsic value.

 

Alphabet also offers a degree of stability that is not universal among the FAANG stocks at the moment. Netflix, for instance, is a riskier proposition due to its falling subscriber count and mounting pressure from competitors.

 

While platforms like TikTok may eat away at small parts of Alphabet’s business around the edges, the company’s moat in the core search and advertising space would be extremely difficult to overcome.

 

As long as prices remain depressed, Alphabet presents an excellent buy opportunity for investors looking to tap into both growth and value at the same time. Although it’s clear at this point that tech stocks are in for a rough year, Alphabet should reward investors who are willing to buy and hold until overall market conditions improve.

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