HomeMost PopularThe Attractiveness of Mega-Cap Stocks and Why Google Stands Out

The Attractiveness of Mega-Cap Stocks and Why Google Stands Out

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Thesis Summary

Mega-cap stocks, despite driving most of the market appreciation, are actually quite cheap when considering the PEG ratio. With what lies ahead, there is a valid reason for mega-cap stocks to trade at a premium.

In my opinion, out of the Magnificent seven, Alphabet (NASDAQ:GOOGL) offers the best value and the most promising outlook.

Mega-Caps Are Relatively Cheap

This year, we have witnessed the birth of the Magnificent 7, an extension of the original FAANG club.

The Magnificent 7 includes Alphabet, Microsoft (MSFT), NVIDIA Corporation (NVDA), Apple, Inc (AAPL), Amazon.com (AMZN), Tesla (TSLA), and Meta Platforms (META).

Looking at the chart above, we can see that mega-cap stocks have significantly outperformed the broader market. Although small-cap stocks in the Russell 2000 (IWM) have remained flat over the past year, META has climbed over 100% in the same time period.

However, the strong performance of these stocks does not automatically indicate overvaluation. In fact, they may be historically undervalued following the recent sell-off.

By measuring the PEG of the Mega Cap tech stocks compared to the S&P 500, we find that the Magnificent 7 have an average PEG of 1.3, compared to the broader market’s average PEG of 1.9. This steep β€œdiscount” since 2013 is currently below the median over the last ten years.

The Best in the Pack

Based on the Non-GAAP FW PEG ratio used by Goldman Sachs (GS), which stock among the Magnificent 7 is the most attractive?

GOOGL

META

TSLA

AMZN

AAPL

NVDA

MSFT

PEG Non-GAAP (FWD)

1.39

1.03

3.24

1.54

2.74

1.23

2.28

EV/EBITDA (FWD)

13.42

11.24

46.67

14.31

21.19

38.70

19.96

Price/Cash Flow (TTM)

17.23

14.17

59.40

21.19

24.01

91.42

27.06

Revenue 5 Year (CAGR)

18.50%

19.97%

47.03%

20.92%

8.51%

22.44%

13.94%

EPS Diluted 3 Year (CAGR)

27.57%

1.45%

200.38%

-0.96%

21.81%

44.84%

18.89%

Source: Seeking Alpha

Based on the table above, META stands out as the most attractive stock, followed closely by NVDA and GOOGL, considering the PEG ratio. In terms of EV/EBITDA ratio, META leads, with GOOGL coming in at a close second. These two companies also excel in terms of Price/Cash Flow, with META and GOOGL trading at multiples of 14x and 17x, respectively.

TSLA and NVDA stand out in terms of revenue growth, with high EPS growth as well. GOOGL follows closely in third place.

While individual investors have their own preferences, GOOGL, in my opinion, offers the best balance of growth and valuation and is well-positioned for the future.

GOOGL’s Strong Position for the Future

With the potential of higher interest rates impacting the market for an extended period, investors need to prepare for this new environment.

If credit tightens and a recession looms, a strong balance sheet becomes essential. In this regard, GOOGL stands out.

With $383 billion in assets and only $116 billion in liabilities, GOOGL boasts a fortress-like balance sheet. The company also holds $118 billion in cash and short-term investments, which will be particularly valuable in the coming years.

If we consider that 1-month T-bills are currently paying 5.56%, GOOGL could potentially earn over $6.5 billion annually from holding these T-bills.

GOOGL demonstrates strength in all solvency measures, making it the strongest among the Magnificent 7.

GOOGL

META

TSLA

AMZN

AAPL

NVDA

MSFT

Debt/Free Cash Flow

1.70

3.59

12.68

14.62

3.03

2.22

4.35

Long Term Debt/Total Capital

8.92%

20.70%

6.56%

42.44%

57.84%

24.70%

24.71%

Current Ratio

2.17

2.32

1.59

0.95

0.98

2.79

1.77

Quick Ratio

2.02

2.20

0.97

0.67

0.81

2.23

1.54

Source: Seeking Alpha

GOOGL has the best Debt/Free Cash Flow and Long-Term Debt/Total Capital ratios. While META and NVDA surpass GOOGL in terms of the Current and Quick ratios, these are less crucial metrics.

Another advantage of GOOGL is its revenue diversification.

While over half of Google’s revenues still come from the US, the company has a strong presence in Europe, the Middle East, Africa, and Asia.

The revenue diversification isn’t limited to geographies, as it also extends to various segments:

While ads still contribute to over half of the revenues, Google Cloud, YouTube, and Google Other are also substantial revenue sources.

Google is more than just an ad company; it has established a global footprint and essentially holds a monopoly on the internet, with 93% of all web traffic passing through Google. This company is here to stay.

Risks

The only real risk for Google comes from regulatory scrutiny. Given its size, Google has become a target in various lawsuits, which may pose a challenge. However, the fact that GOOGL can shrug off these challenges highlights the company’s resilience and strength.

Final Thoughts

The rally of the Magnificent 7, compared to other stocks, is not without reason. The big are getting bigger, and no one exemplifies this more than GOOGL. In my opinion, it is a must-own stock and an excellent choice for a recession-resilient portfolio, thanks to its strong balance sheet and revenue diversification. GOOGL is perhaps my highest-conviction stock in challenging times.

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