Alphabet (GOOG 0.20%) (GOOGL 0.41%) 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.
NASDAQ: GOOG
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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.
