Why Alphabet Stock Popped on Monday
Alphabet's stock rose 2.3% on Monday due to positive news regarding President Trump's tariffs on electronics and a supportive note from Citigroup, which maintained its $195 price target. In contrast, DA Davidson cut its target from $200 to $160, rating the stock as 'neutral.' While investors lean towards Citi's outlook, some analysts, including the author, believe a significant price drop is necessary to consider buying, with a target price around $100 per share for Alphabet.
Alphabet (GOOG 1.24%) (GOOGL 0.95%) stock inched higher in Monday trading as the market turned green again on positive news of a moderation of President Trump's tariffs on electronic goods. As of 11:05 a.m. ET, the stock is up a modest 2.3%.
Also perhaps encouraging investors was a not-too-negative note on Alphabet from investment bank Citigroup.
What Citi said about Alphabet
As StreetInsider.com reported this morning, Citi has trimmed its price targets on several internet stocks based on its guesses as to how the tariffs, and a generally slowing economy, might depress growth prospects in this sector. Broadly speaking, Citi is reducing its forecast for both revenue and profits growth, but leaving its $195 price target for Alphabet in particular intact.
This contrasts with a note from DA Davidson, carried on TheFly.com this morning, that warns of the same slowdown (at least for a couple quarters), but cuts its Alphabet price target from $200 to $160 -- and rates the stock only "neutral."
Should you buy or sell Alphabet?
Investors seem to be siding with Citi in this debate -- but I find myself more in agreement with Davidson. As luck would have it, you see, I was running valuations of my own on a series of stocks on my "shopping list" (stocks I'd like to buy as prices get cheaper) over the weekend. Alphabet was on this list, and I calculated it as selling for just over 25.5 times free cash flow.
Relative to a 16% projected growth rate, that yielded a price-to-free cash flow-to-growth ratio of 1.6, whereas I like to buy for a ratio closer to 1.0. Long story short, I concluded it will take a 30% to 40% reduction in price to entice me to buy the stock. Sure, DA Davidson itself is only lowering its price target by 20%, but at least it's moving in the right direction.
Is my valuation too conservative? Perhaps. But I'd rather be safe than sorry. It's going to take about a $100 or so share price to convince me to buy Alphabet stock.