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Why Alphabet Stock Popped This Morning

The Motley Fool · 1d ago

Key Points

  • Tigress Financial Partners analyst Ivan Feinseth raised his price target for Alphabet stock last night.

  • Alphabet is an AI leader "across Search, Cloud, and YouTube."

  • Alphabet's actual free cash flow is barely 22% of its claimed "profits," however.

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) stock jumped as much as 3% in early trading Friday before retracing a bit later in the morning. As of 11 a.m. ET, Alphabet stock is still up a modest 1.1%.

You can probably thank Tigress Financial Partners for the boost.

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Analyst Ivan Feinseth at NYC-based financial services company Tigress Financial Partners raised his price target on Alphabet stock last night, you see. Valuing the tech giant at $485 a share (up from $415 previously), the analyst insists Alphabet stock is still a "strong buy."

And why?

Because AI. That's why.

AI face looming over a man at a computer screen.

Image source: Getty Images.

Why Google makes Tigress purr

Feinseth calls Alphabet a leader "across Search, Cloud, and YouTube," and says the company's "AI flywheel" is boosting earnings across all of these businesses. Revenue is growing, profit margins widening, and monetization... monetizing, argues the analyst in a note covered on StreetInsider.com.

In the short term, we're still seeing issues with return on capital (and insanely high capital spending). But longer term, the analyst argues, "Alphabet's scale, profitability and diversified ecosystem support exceptional long-term returns."

What's next for Alphabet stock?

Many analysts agree with Tigress's assessment. According to data from S&P Global Market Intelligence, Alphabet's seemingly reasonable 17.2x price-to-earnings ratio is nearly matched by a forecast for 14.6% annual earnings growth over the next five years. Factor in a modest 0.3% dividend yield, and the total return ratio for Alphabet is only 1.1x -- not a huge premium to pay for a technological leader.

What worries me is not Alphabet's GAAP earnings, but its actual free cash flow. With capex continuously draining operating cash flow as it builds out its AI empire, Alphabet's trailing FCF is currently barely $53 billion -- less than 22% of reported "earnings."

Maybe I'm overreacting here, but when I look at Alphabet's 80x price-to-free cash flow ratio, buying this stock is the last thing I want to do.

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.