Google: I’ve never bought more aggressively than now (NASDAQ:GOOG)

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400 tons max

Alphabet Inc. (NASDAQ: GOOG) saw its share price drop 8% yesterday as the market overreacted to Google’s AI chatbot event.

Also, despite persistent headwinds in the ad sales market, Google’s fourth-quarter earnings were solid and not half bad. Given that the market currently undervalues ​​tech companies like Google, I believe there’s a good chance that Google’s stock is undervalued.

The 8% drop in Google’s market valuation seems insignificant to me, and I believe the market and analysts are underestimating Google’s potential.

Double-Miss is a distraction

Google took some heat for reporting a double blunder in terms of sales and profit in the fourth quarter, but these blunders were minor and don’t really tell investors much.

My general take on earnings releases is that investors shouldn’t place too much value on them because they’re just snapshots of what’s happening in a company.

Google earned $1.05 per share versus $1.20 expected, missing estimates by 12.3%. Sales were $76.1 billion, 0.6% less than expected.

Earnings Calls (Alphabet Inc)

Even if Google fell short of expectations, it is also true that Google is a large company with significant raw cash generating power.

Google’s fourth-quarter revenue was $76.1 billion, an increase of 1% year over year. Google’s advertising sales were $59.0 billion, down 3.5% year over year, as the advertising market correction continued to bite.

Q4 2022 Revenue (Alphabet Inc)

Overall, I believe Google’s 4Q-22 earnings report was much stronger than the market is willing to acknowledge. Even as ad sales continue to face headwinds, investors have had more than a year to consider slowing sales growth for Google and so, in my opinion, the current weakness in the ad sales market is already more than fully supported in Google evaluation.

The market overreacts to the ‘Bard’ chatbot

Yesterday, Google’s stock price fell 8%, wiping out an estimated $100 billion in market value, after Google’s new AI chatbot, Bard, answered a question incorrectly.

AI bots are the hot topic in the tech industry right now, thanks to the huge popularity and notoriety of OpenAI’s ChatGPT bot in the short time it’s been available to the public. The market likely sees Bard’s incorrect answer as a sign that Google is falling behind Microsoft, which has invested in OpenAI, in terms of developing AI capabilities.

That said, it’s too early to pass judgment on AI technology because the race has just begun, and Google, as I’ll demonstrate below, has a huge profit base to leverage against Microsoft and other companies.

In my opinion, the market is overreacting to this news and I expect Google’s stock to recover from this unwarranted sell-off.

Huge profitability, great cash value per share, bargain valuation

The market reaction to the news discussed in the previous paragraph is funny to me because Google has such raw earning power and deep pockets that the tech company is highly unlikely to fall behind Microsoft in AI.

Google’s 2022 profits were $59.98 billion, or $4.56 per share. That’s a profit of $5 billion a month, every month of the year, indicating that Google is making money faster than it can spend it. And things seem to improve in the future.

Earnings are expected to be $6.09 per share in 2024, with a P/E ratio of 16.4x. However, Google has a significant amount of cash on its balance sheet, which I like factoring into Google’s valuation. The tech company reported total liquidity of $113.76 billion, including marketable securities, or $8.65 per share.

Since Google is currently trading at $100, approximately 9% of Google’s market capitalization is cash (+tradable securities). After deducting this cash, Google has a 15x earnings multiple, an attractive valuation for one of the world’s leading technology companies.

Additionally, the market expects a 19% rebound in Google’s earnings per share in 2024, implying that plunging ad sales probably won’t be an issue next year.

Earnings Estimator (Yahoo Finance)

The “Being Too Soon” Problem

Loudly declaring that I’m buying aggressively right now opens the door for criticism if the stock price continues to fall. However, it is always possible for a share price to fall further, especially if the trend is already negative, as in the case of Google.

I don’t think the “Bard” report is particularly disheartening, but there is a possibility that Google’s advertising sales will deteriorate further than where we are now.

Furthermore, if Google were to completely fail its AI chatbot business for any reason, the market reaction could be even harsher.

My conclusion

This is one of the few times I’d recommend investors get aggressive and load the truck with Google stock on the cheap.

Google has massive earning power ($5 billion a month) and the notion that Google is losing the AI ​​race to Microsoft is, in my view, naïve.

With $59.97 billion in profit and $8.65 per share in cash at the end of 2022, I believe Google represents extremely good value for long-term investors looking beyond a quarter’s performance.

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