Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) stock inched 2.5% higher through 1:10 p.m. ET Monday after getting a boost from investment bank Wedbush.
Previewing Alphabet's expected Q2 earnings report Tuesday, Wedbush reiterated its $205 price target and outperform rating on the stock, based on its belief that competition from rival artificial intelligence (AI) services has done little damage to Google's dominant internet search business.
What Wedbush said about Alphabet
Growth at Alphabet's all-important Google Search business should be as high as 12.8% in Q2, argues Wedbush analyst Scott Devitt in a note covered by The Fly today -- better than the 12% growth Wedbush previously postulated, and very close to the 12.9% revenue growth analysts are forecasting for Alphabet overall this quarter.
Factor in all the other parts of the Google ecosystem, plus contributions from Google Cloud, Google's own artificial intelligence products, and "other bets," and Devitt sees Google growing total revenue by 13.1% for the quarter -- which is actually more than most analysts are expecting.
So long story short, Devitt is predicting a sales beat for Alphabet -- and potentially an earnings beat as well.
Is Alphabet stock a buy?
How much will earnings need to grow to make Alphabet stock a buy, though? Valued on trailing earnings, Alphabet stock costs about 27 times earnings today. That's a bit pricey given consensus forecasts for 18% long-term earnings growth, but perhaps not unjustified seeing as Alphabet remains the dominant search provider -- and seems to remain dominant despite new competition from AI companies such as ChatGPT.
What's a bit more worrisome is the company's free cash flow, which hasn't measured up well against reported net income since 2022, and in fact currently lags reported income by about 16% (i.e., for every $1 Alphabet reports as profit, it's actually only generating about $0.84 in real cash profit). Valued on these cash profits, Alphabet looks significantly more expensive at a price-to-free-cash-flow ratio of 32.
Dominant business or not, I personally would want to see Alphabet stock trading quite a bit cheaper before calling it a buy right now.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
