Google: The Best Bet In Big Tech Is On Sale Again

Summary:

• Big Tech stocks have seen a huge ramp in price in 2023, but there are disparities in valuation and underlying business success.
• Google is cheap with a strong growth trajectory, while its peers like Apple, Tesla, and Amazon are more expensive with worse earnings prospects.
• Google is the best value among the “magnificent seven” tech stocks. I’m raising my price target to $164 for 2024.

And Danny says we’re living in a simulation

But he works in a petrol station (Selling petrol)

He says it all began with his operation

And I know you think you’re sly, but you need some imagination.

–The 1975, “It’s Not Living If It’s Not With You.”

Investors have celebrated the roaring success of the “magnificent seven” group of stocks this year, with the group up around 100% for the year. But underneath the hood, the huge ramp in the stock prices in Big Tech belies disparities in valuation and in the success of their underlying businesses. This time last year, overmedicated venture capitalists were proclaiming the end of Alphabet Inc. (NASDAQ:GOOG), (NASDAQ:GOOGL) because of ChatGPT and AI. It didn’t happen. Google spent the last 10 years investing massively in AI anyway, and fears of Google’s business getting crushed were quickly proven wrong. Google is cheap with a powerful growth trajectory, while its peers are far more expensive with worse prospects. Google trades for a fraction of the multiple of peers like Apple Inc. (AAPL), Tesla, Inc. (TSLA), and Amazon.com, Inc. (AMZN).

The Magnificent Seven Are Overhyped

Of course, the irony in naming Big Tech stocks the “magnificent seven” is that the title is borrowed from an old Western movie where four of the seven end up dying in battle by the end of the film. Index concentration in a few heavily hyped tech stocks has created a bull market out of a slowing economy. The reverse could also be true, with idiosyncratic business performance from just a few companies like Apple and Tesla capable of pushing the market into a bear market by themselves. After all, history shows that heavily hyped stocks can go up 100% in one year they can go down 50% in the next. Research also shows that the more concentrated the market is, the greater the payoff for diversifying away from it. It’s clear that few, if any investors are running the numbers before buying, instead relying on greater fools to pay a higher price still. My peers who started investing in the 2010s repeatedly tell me that valuations don’t matter, and they don’t care about P/E ratios, but history would beg to differ.

Let’s do something few investors ever bother to do – look at earnings estimates and valuations for the magnificent seven. They might not matter now, but they’ll be front and center if and when the economy slows.

• Apple- $6.55 EPS estimate for FY 2024, 29.5x P/E ratio. Analysts are steadily revising estimates down.
• Microsoft Corporation (MSFT)- $11.20 EPS estimate for FY 2024, 33.1x PE/. Here again, we see estimates being revised steadily down once analysts understood the true economics of the company’s Open AI acquisition. ChatGPT is not a big moneymaker, and there’s not a clear path to making it one in the short run. Still a good company, but an expensive stock.
• Amazon- $3.46 EPS estimate for 2024, 42.2x P/E. Similar story on revisions, though Amazon recently is getting some love from analysts and seeing some bumps for 2024’s estimates. One thing to note is that earnings estimates are all over the place for them. If business slows and sentiment shifts, that’s a ton of potential downside.
• Tesla- $3.98 EPS estimate for 2024, 60.2x P/E. Tesla is a cult stock, but the valuation is hard to swallow. It’s roughly flat since S&P 500 (SPY) inclusion, indicating that now there are no longer any “greater fools” to buy at geometrically higher prices. Also, TSLA is getting crushed by earnings revisions.
• NVIDIA Corporation (NVDA)- $12.30 EPS estimate for 2024, 37.9x P/E ratio. This one actually surprises me, and it indicates that the move in NVDA wasn’t total BS, and is being backed up by earnings soaring. If you look back to the crypto boom though, Nvidia’s financial statements show that its earnings are intensely cyclical. With this in mind, Nvidia stock is a risky bet, but not an insane one to make. Still, the valuation is high given the cyclicality of its business, reflecting the huge public interest in the stock.
• Meta Platforms, Inc. (META)- $17.28 EPS estimate for 2024, 18.9x P/E ratio. The company formerly known as Facebook is reasonably priced. While there are some reasons to doubt Meta’s earnings estimates for 2024, the stock price reflects expectations for business performance and the multiple fairly reflects the cyclicality of its business.
• Alphabet Inc. (GOOG), (GOOGL) – $6.67 EPS estimate for 2024, 19.9x P/E ratio. This is interesting. If you take a peek at Google’s financials, you’ll see what a juggernaut the company is. Operating income has increased every year for 10 straight years. Zero down years. Google deserves a higher P/E ratio, while peers deserve a lower P/E ratio. This is what growth stocks are supposed to look like. But despite strong business performance, Google is the second cheapest of the magnificent seven. And unlike Meta, Google is not a constant rollercoaster. Metaphorically speaking, META stock is a cruel mistress, while Google is the girl next door.

The number one and two contributors to my lifetime P/L are Apple and Tesla, respectively. But the numbers started to change in 2019, and they’ve continued to do so. Business performance has been replaced by hype, and it’s likely to burn investors who buy without respect for valuations. Of the magnificent seven stocks, I’d argue that four of these will get completely crushed at some point in the next couple of years, with my best guess for the losers being Apple, Tesla, Amazon, and Nvidia, while Google, Microsoft, and Meta end up doing better.

Throughout my career, P/E ratios have tended to correlate much more with how much publicity a company gets rather than with the underlying financials. From 2019 to now, none of that mattered because traders could throw darts and win, but this was a brutal lesson when the dot-com crash and 2008 housing crash happened. During my formative years, countless neighbors, acquaintances, and classmates’ families went bankrupt from overleverage. This shaped my thinking to be more conservative, especially concerning borrowing large sums of money. You can be conservative and still bet big when the odds favor you though. In the aftermath of the crash, Apple traded around 10x earnings for years. The path to a much higher price for Apple was obvious, and I sketched it on the back of a napkin at the time with friends at the campus bar in Miami. Even as late as the winter of 2018, Apple was dirt cheap. These companies are not cheap anymore, and you should pay attention.

But Google Is Underhyped

Compared with the antics of CEOs like Elon Musk and Mark Zuckerberg (who challenged each other to an MMA fight), Google is almost quaint. They have the obligatory antitrust conflict with the US and EU governments, but no one from Google’s management is challenging other CEOs to cage fights. If you look at Seeking Alpha articles, Nvidia and Tesla articles frequently get hundreds of comments. The comment section of Google articles is much quieter, and that’s exactly what you want – good financials and not as much drama.

In September, I hung a $162 price target for Google and showed how the stock has a potential upside to $200 in the coming years. This thesis is intact. Based on the same analyst estimates I used in my original article, I’m raising my price target for Google by a bit, from $162 to $164. If the overall market tanks this price target won’t hold up, but based on Google’s business I think $164 is a reasonable price. Google is doing great in YouTube and search revenue is holding the fort down. There are still billions of dollars in ad spending done on TV and in print, but Google advertising is simply more effective for many niches. The shift from saturation advertising to targeted advertising is bound to continue, and I know this every time I see ads for obscure pharmaceuticals on Monday Night Football. Google dropped sharply following Q3 earnings in October on slowing cloud growth. But cloud revenue is a cherry on top for Google, and I feel that the drop reflected investors trying to outbid each other in the run-up to Google’s results. Operating income for Google is up about 10% over the past 12 months, continuing the company’s run.

Google isn’t necessarily a recession-proof stock, and it’s possible earnings estimates for the company are too high along with the rest of the market. However, I feel much more comfortable placing a bet on secular growth for Google at 19.9x earnings than on other Big Tech companies at 2x the valuation or more. What investors shouldn’t worry about is Google becoming obsolete – the company’s network effects and moat get stronger with each passing year.

A technical note on Google – you can buy Class A stock (GOOGL) or Class C stock (GOOG). As is typical, the class A stock is the better buy, as it gives you the same ownership in the company for about $1 per share cheaper. Investors tend to buy the Class C stock. I expect that in the future Google will focus more of its buybacks on Class A stock, especially if the spread gets out of line. Anyway, it’s a free roll so you might as well buy the A shares.

Here’s the premium/discount over time, as well as now. The fair ratio is known- it’s 1. Buy GOOGL, not GOOG and you’ll get a better value.

Bottom Line

Google stock is the best value of the “magnificent seven” tech stocks. After a pullback, the stock is on sale for the holidays. I’m raising my price target for 2024 to $164 for Google. Compared with overhyped peers, I like Google’s business a lot and expect them to do well as the years continue to pass. While the overall market is likely too high, Google’s business success is hard to ignore and will ultimately drive investors in the stock to profit.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of GOOGL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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