(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of GOOGL & NFLX.)

Since peaking on June 8, shares of Alphabet Inc. (GOOGL) have declined by nearly 8 percent after the company reported underwhelming second-quarter earnings results. The broader S&P 500 and Nasdaq have only given back 40 basis points and 1.5 percent, respectively, through August 18. Fellow FANG stock member Facebook Inc. (FB) has risen by over 8 percent, while Amazon.com Inc. (AMZN) has fallen by 5 percent. The recent decline in Alphabet, the parent of Google, brings its valuation to compelling levels versus its two FANG peers. 

GOOGL Chart

GOOGL data by YCharts

Underwhelming Second Quarter

The second quarter itself wasn't terrible; it just wasn't exciting enough to get investors to buy more shares of Alphabet. After all, the company did beat on the top and bottom line, and analysts have even been raising their third-quarter estimates over the past few weeks. But Alphabet shares are already up nearly 17 percent so far in 2017. That's well off the high, but still a respectable gain. The recent pullback in Alphabet makes it compelling, especially based on its valuation.

GOOGL EPS Estimates for Current Quarter Chart

GOOGL EPS Estimates for Current Quarter data by YCharts

Valuation Is Cheap Compared to Fellow FANG Stocks

Alphabet's one-year forward PE ratio has declined to a hair under 23. It had been up near 24.5 at one point while showing a one year-forward EV/EBITDA ratio of less than 13. Fellow FANG member Facebook sports a forward PE of almost 25 and an EV/EBITDA of nearly 18.5. Meanwhile, Amazon has a forward PE of almost 110 and an EV/EBITDA of approximately 25, making Alphabet the cheapest of the three. 

FB EV to EBITDA (Forward) Chart

FB EV to EBITDA (Forward) data by YCharts

More Consistent Growth

The reasonable valuation for Alphabet is mostly because it is also expected to grow revenue by roughly 67 percent over the next two years. Meanwhile, Amazon and Facebook are supposed to increase by 81 and 132 percent, respectively, over the same period. Still, Alphabet has nothing to be ashamed of because analysts are looking for earnings to grow by almost 40 percent compared to Amazon's 207 percent, and Facebook's 93 percent.  

Even at current levels, Alphabet shares are compelling because Amazon's revenue growth – as impressive as it – has never been able to consistently grow earnings because the company aggressively spends money to keep its growth engine revving. Facebook will be challenged with continually having to drive more and more revenue per user, while user growth continues to slow. 

With estimates of $48.46 by the year 2019, Alphabet could be a very promising investment at current levels. At 20 times 2019 estimates, GOOG shares are worth about $970, assuming estimates for the company do not rise, which implies a 5 percent discount from current levels. But the company has had a history of topping earnings estimates on many occasions and beating revenue estimates.

Additionally, the multiple in itself could be viewed as conservative based on expected future growth. At 25 times future earnings power, shares could easily top $1,200, as we noted back in July. (See: Why Alphabet's Stock Could Jump to Over $1,200.)

GOOGL Quarterly Revenue Estimates Chart

GOOGL Quarterly Revenue Estimates data by YCharts

Alphabet is the cheapest of the FANG stocks, and although it does not offer the blistering growth rates of the others, it offers consistency at a steep discount, with plenty of room for upside. 

 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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