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Alphabet Looks Like Good Value With Strong Q4 2021 Results and FCF

Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) reported very strong fourth-quarter (Q4) and full-year 2021 results on Feb. 1. There is every indication that GOOG stock should have a good year, just like it did last year.
Source: turtix / Shutterstock.c…

Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) reported very strong fourth-quarter (Q4) and full-year 2021 results on Feb. 1. There is every indication that GOOG stock should have a good year, just like it did last year.

Source: turtix / Shutterstock.com

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But so far, year-to-date (YTD) the stock is actually down 6% at $2,694.69. However, this is much better than the S&P 500, which is down 7.97% so far YTD.

Not to worry, though, since Google is a virtual cash machine. It produces massive amounts of free cash flow (FCF). That goes a long way in helping support the stock, which now has a huge market value of $1.78 trillion.

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Where Things Stand With Alphabet

Alphabet reported that its Q4 revenue hit $75.3 billion, up 32% over last year’s Q4 revenue of $56.9 billion. Moreover, its full-year 2021 revenue, mostly from digital online advertising sales, was up 42% to $257.6 billion.

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This is was much better than analysts had been expecting. As I wrote two weeks ago, they were forecasting revenue would be up 39.3% (not 42%) to just $254.3 billion in 2021. So, the $257.6 billion actual revenue was 1.3% better than the forecast. That is not much from a percentage point standpoint, but it is billions of dollars in the real world.

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But more importantly, Alphabet generated a large amount of FCF — $18.55 billion in Q4 — as shown on page 7 of the earnings release. Moreover, for the full year, it generated $67 billion in FCF, based on information in its cash flow statement on page 6 of the release.

This is a huge amount. It means that 26% of each sales dollar went straight into the company’s bank account, free of any requirements. That is, it had a 26% FCF margin for 2021.

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It also allowed the company to buy back a staggering $50.27 billion of its common stock during the past year. That clearly helped lead GOOG stock higher, as it rose over 65% last year. Moreover, it all came out of the $67 billion in FCF, so Alphabet did not have to borrow any money to repurchase its shares.

Where This Leaves Alphabet Going Forward

The $50.3 billion in stock market purchases represents about 3.53% of its average market capitalization last year (on a straight-line basis). In effect, it is almost the same as a dividend yield, since it is a return of capital to the remaining shareholders. Moreover, it leaves room for the company to decide to pay a dividend at some point if the situation warrants it.

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That is clearly not out of the question. For example, if the U.S. Federal Reserve begins to dramatically raise rates, it could hurt GOOG stock. So, although this might have a slightly detrimental effect on its revenues, the company will also be able to buy back shares cheaply. But shareholders may want more and the board may decide to pay a dividend.

So far, there is no indication they are considering this. But their multi-trillion rival Apple (NASDAQ:AAPL) both pays a dividend and buys back stock.

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What to do With GOOG Stock

Analysts are still very positive on GOOG stock. For example, TipRanks.com reports that 11 analysts who have written on the stock in the last three months have an average price target of $3,512.73. That represents a potential upside of 30% over today’s price of $2,694.69. It also is higher than the prior target of $3,386.67 as of Jan. 26.

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Analysts expect revenue will surpass $300 billion this year ($303.75 billion, according to Refinitiv, as shown on Yahoo! Finance). So if we apply a 26% FCF margin, this implies that FCF will hit $79 billion this year.

Using a 3% FCF yield metric, this implies that its market will surpass $2.6 trillion (i.e., $79 billion/0.03=$2,632 billion).

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That is 48% over today’s market cap and could represent a price target of almost $4,000 this year (before the upcoming 20 for 1 stock split set for Jul. 15, 2022). This means we could see a price of $3,978 before the split and $198.91 post-split. That is a very good return on investment for most investors in such a large market cap company.

On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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Mark Hake writes about personal finance at mrhake.medium.com and Newsbreak.com and runs the Total Yield Value Guide which you can review here.

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