Alphabet (GOOGL) The stock of this giant is constantly undervalued. The company outgrowths the market every quarter, and now it is set to “turn on” its Gemini AI project. Be aware of the Terminator coming. Many investors and analysts underestimated Google being late into the AI game after its initial failure with its chatbot. They take AI seriously and work on it aggressively, planning to integrate AI into YouTube, News agencies to help reporters write news reports, and integration in the Google Drive suite (namely into the Google Docs and Sheets apps). This is to fight back the threat to their search engine dominance and, if successful, expect rapid growth in earnings and stock appreciation.
 

 

 

GOOGL is in stage #2. The stock just broke up from its consolidation pattern. It rallied but then stalled again. There seems to be a lot of negativities about this company. I think it is all coming from the initial AI chat bot Bard failure. Everyone thinks Google lost this battle and now its biggest competitor, Microsoft, got ahead. This threatens the $150B search engine and advertising market Google dominated for year. And it still dominates but investors and analysts are gloomy about it. As is typical for Wall Street, they think Google is done. It’s over. The company is finished. Of course, that’s all wrong and nonsense.

 

 

Google’s Deepmind chatbot was found to be a better, large language model than the openAI’s Chatbot. But due to the initial error with Bard, investors are dismissing Google and do not take it seriously. That brings a good opportunity for those investors who understand that this “discrimination” will not last long. As soon as investors who shun Google now realize that they were fools, they will start rushing in again.

Google is expanding Bard in Europe and it is more robust than when they first unveiled the demo.
And now, Google’s co-founder Sergey Brin has returned to the company to help working on AI personally. They are also returning to the work on Gemini AI. The project was supposedly stopped out of fear of AI becoming self-concious. Google’s Gemini AI model, short for Generalized Multimodal Intelligence Network, is the company’s latest advancement in artificial intelligence. Unlike traditional AI models limited to processing a specific data type, Gemini is a multimodal intelligence network capable of simultaneously handling various data types and tasks, including text, images, audio, video, 3D models, and graphs.

Gemini is not just a single model but a network of models working together to enhance the system’s overall capability. This unique network architecture enables Gemini to perform a wide range of tasks without requiring specialized models for each task.

Gemini offers several advantages compared to other large language models like GPT-4. Firstly, it is highly adaptable and can process data and tasks without requiring specialized models or fine-tuning. Additionally, Gemini can learn from any domain and dataset without being constrained by predefined categories or labels.
Google’s revenue has had a very rapid growth over the years. But in 2021-2023 this growth in revenue seemed to be stalled and now going sideways. This can be another reason for the stock price to struggle moving higher. A 1-year revenue growth is only 0.15%. Not very good. A 5-year growth is at 16.4%.

 

 

We see the same issue with the free cash flow growth. It is very positive, but not growing anymore.

 

 

Google’s EPS growth saw significant decline during 2022. The stock followed down. I always advocate the stocks and the stock market follows earnings. We see it here too. And you will see it in other charts. In 2023 Google’s earnings recovered and started growing up. If this trend continues, the stock will follow:

 

 

GOOGL is a cash cow. Its cash on hand was strong and growing every year. Only in 2022 we saw a significant decline. But given a very low debt the company carries this is not a concern at all. In fact, Google has a lot of cash on hand to invest in the AI and overcome their competition that doesn’t have this much cash.

 

 

Google spends heavily (almost $12B) on the Research and development. Putting money in their AI development. For example, Microsoft spend only $7B in R&D, so Google is outspending its biggest competitor.

 

 

GOOGL doesn’t pay dividends, so purchasing this stock is purely a growth play. I am OK with this. I keep buying Google and use options to generate income from my holdings (primarily trading the wheel strategy).

The company had a steady level of shares outstanding but in 2014 issued a large number of new shares diluting its current shareholders. The shares outstanding continued going higher but not as much as in 2014. However, since 2019 Google started buying back its shares and the level is slowly declining (1-year buyback are at 3.14%, 5-year at 1.83% rate).

 

 

The share dilution can be also seen in stock compensation that effectively reduces free cash flow:

 

 

The blue columns show stock compensation that is steadily growing. This was Google’s problem since 2020 when the company started aggressively hiring and now it is dealing with overemployment and layoffs. Stock compensation is a part of the problem.

As we can see in the chart below, Google’s earnings were expected to decline in 2022. The stock followed down too. For 2023 the earnings are expected to start recovering increasing the stocks fair value to $162 a share (see orange line in the chart below). By 2025 the fair value is expected to be at $221 a share.

 

 

 

The stock is now AGGRESSIVE BUY
 

This post was published in our newsletter to our subscribers on Sunday, July 22th, 2023. If you want to learn more about our stock technical analysis subscribe to our weekly newsletter.