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A large tranche of near-term call options traded in GOOGL stock, highlighting Alphabet Inc.'s (GOOGL, GOOG) underlying value. Although the company generated strong free cash flow in Q4, the stock is down, providing an opportunity for value players.
GOOGL stock is at $188.96, off over 8% from its peak yesterday of $206.38. This is despite its strong Q4 results released yesterday, showing Alphabet's strong results, including its highest quarterly free cash flow (FCF).
This provides an opportunity for value investors to buy the dip today. It also may be why a large tranche of call options have traded, as seen in today's Barchart Unusual Stock Options Activity Report.
The report shows that 2 large tranches in GOOGL calls and 1 GOOG call option tranche have traded in large numbers.
For example, there are over 4,300 contracts traded in the Feb 14, 2025, expiration call GOOGL call options at the $192.50 strike price. The buyers of these calls were willing to pay $2.30 for these options on the ask side. That makes their breakeven price $194.80, or +2.68% higher than today's price.
That means they are quite bullish on the stock. After all, just yesterday the stock was well over $200 per share. So, in effect, this is one way to play the dip in GOOGL stock.
Let's look at why that might be a good play for these investors.
Strong Free Cash Flow (FCF)
Alphabet reported that its Q4 revenue rose 12% YoY, and its net income was up 28%, with earnings per share (EPS) 31% higher. However, according to Seeking Alpha, its $96.5 billion in quarterly revenue was $200 million lower than consensus forecasts.
That could account for the stock's dip today, although the miss was only 0.21% lower than expected - i.e., not much. Other point out that its stock price weakness could be due to lower Cloud results.
For example, the company's Cloud Computing revenue growth seems to be slowing, even though it was up 30% YoY. Last quarter it was up 35% YoY. Moreover, its QoQ Cloud Computing sector growth was up just 5.8%, rising from $11.35 billion in Q3 to $11.96 billion in Q4. On an annualized basis, that represents a lower +25.3% compounded rate.
Nevertheless, Alphabet's free cash flow, which is operating cash flow after capex spending, was its highest ever at almost $25 billion.
That represents a very high 25.75% FCF margin on sales. This is significantly higher than its prior FCF margins.
For example, last quarter (Q3), Alphabet made $17.767 billion in FCF on $88.268 billion in sales, or a 20.1% FCF margin. And a year ago, its Q4 2023 FCF was $7.9 billion, or just 9.15% of its $86.3 billion in Q4 2023 sales.
In other words, the company's revenue has risen 12% YoY, but its FCF has surged by 214%, and its FCF margin has soared by 181% (i.e., 25.75%/9.15%-1 = 1.81x).
This bodes well for the company's outlook going forward. For example, over the last 12 months (LTM) its FCF was $72.764 billion, representing just 20.7% of its $350 billion in sales.
Forecasting Free Cash Flow
Analysts now project that Alphabet's 2025 revenue will hit $390.03 billion and 2026 will have $432.03 billion in revenue. That implies that over the next 12 months (NTM) its run rate revenue will be $411 billion. That is 17.4% higher than last year's $350 billion in sales.
Therefore, if the company can maintain a 25% FCF margin over the NTM period, FCF could rise by over 41%:
$411 billion NTM revenue x 0.25 = $102.75 billion FCF
$102.75 billion / $72.76 billion LTM FCF = 1.412 = +41.2%
In fact, even using just a 23% FCF margin, slightly higher than last year's 20% FCF level, its FCF would be $94.53 billion, or +29.9% higher than in 2024.
That could push GOOGL stock higher over the next year.
Target Price for GOOG Stock
For example, let's assume the market gives the stock a 3.0% FCF yield valuation. That implies that the dividend yield would be 3.0% if the company would pay out 100% of its FCF.
So, to calculate the target price, we divide the forecast FCF over the NTM period by 3.0%:
$94.5 billion / 0.03 = $3,151 billion (i.e., $3.15 trillion)
That represents a 35% rise in value over today's market cap:
$3,151b / $2,340 b -1 =1.3466 - 1 = +34.66%
In other words, GOOGL stock is worth 34.66% more:
$189 x 1.3466 = $254.51 target price
That is slightly higher than where other analysts have their price targets. For example, Yahoo! Finance shows that 63 analysts have an average price target of $215.18 per share. Similarly, Barchart shows a mean price target of $218.23, with a high of $240.00.
In addition, AnaChart.com, which tracks recent analyst recommendations, shows an average of $231.21 per share. That is close to my price target and represents an upside of +22.3% from today.
So, this shows that there is still significant upside potential in GOOGL stock. That could be why investors are buying large tranches of near-term call options in GOOGL and GOOG stock.
