Alphabet or Google (NASDAQ:GOOG ) (NASDAQ:GOOGL ) is one of the great tech companies on earth. Despite this the company missed earnings expectations in the second quarter of 2022. This was driven mainly by tepid advertiser demand, which is cyclical in nature. The stock has now been butchered and is down 33% from its all-time highs in November 2021. In addition, the stock is flirting with 52-week lows of just $99 per share, while being undervalued intrinsically. Thus in this post, I'm going to revisit the dominant business model, break down its financials, analyze its technicals and of course, unpack its valuation, let's dive in.

Google or Alphabet has one of the most dominant business models in history. Google is what I like to call the "Backbone of the Internet", having written multiple deep-dive posts on Google stock, here are a few of the reasons why;

From the chart, below you can see "Google" [turquoise box] is the beating heart of the company with the aforementioned platforms. However, Alphabet also has a Fiber optics division [green box] that owns a series of deep-sea fiber optic internet cables which truly does make the business, "the backbone of the internet".

Alphabet also owns, "Nest" which focuses mainly on Google hardware and smart home products. Examples include smart speakers, thermostats, cameras, doorbells, and even a gaming stream service. You can think of Nest as Alphabets equivalent to "Ring" which was acquired by Amazon (AMZN). Although I personally believe Amazon is much stronger on hardware and Google should stick mostly to software, after disasters with Google Glass which was ahead its time.

Alphabet also has a venture capital arm called "Google Ventures" which invests into early-stage tech companies and Google Capital which invests into long-term tech trends. The company even has investments into a company called Calico which has bold plans to help us "live forever" by reversing the aging process.

Alphabet has always had a culture of "experimentation" since the early days and has made huge R&D investments into a series of bold bets. Examples include; Internet Balloons, Energy Kites, Seawater fuel, and many more. The majority of these are very speculative in nature and true "moonshots". However, there are some which are starting to gain major traction and could add some extra optionality to the stock. The most notable is Waymo Google's Self Driving Car business unit, which has "graduated" from Project X. Waymo is already operational in Arizona, where you can download the Waymo One app and call yourself a self-driving vehicle. In addition, the company has started to roll out its services with real human testing in San Francisco. Like the ridesharing phenomenon with Uber and Lyft, the key to success will be who can prove their technology in the major cities and gain traction.

Self-driving vehicles are poised to disrupt both the traditional ride-hailing industry, car rental, and even rail. These vehicles have the potential to create a "third space" where people can use the vehicle as a mobile office and travel from city to city, point to point with ease. Thus it's no surprise that the global autonomous vehicle market is forecasted to grow at a rapid 40% CAGR and be worth an astronomical $2.1 Trillion by 2030.

Waymo is also working on Autonomous Trucking, which is extremely necessary due to the rise in e-commerce logistics and the shortage of truck drivers. The company has already tested its vehicles on 240-mile route across Texas. In addition, they have scored partnerships with Logistics giant C.H. Robinson (CHRW) and even UPS (UPS). Waymo also partnered with Uber Freight to integrate into Uber's logistics app. Thus its clear, that Waymo is truly gaining traction and this is fast becoming a reality.

Alphabet announced solid earnings for the second quarter of 2022. Revenue was $69.7 billion, which popped by 13% year over year, but did miss analyst estimates by $111 million. This may not seem like great growth for Google, but taking a step back the business produced a stronger than normal quarter for the Q121, with astronomical growth of 62% year over year. This was driven by a boom in advertising spending as the economy reopened and businesses aimed to capture the demand. A strong dollar also impacted Google's international revenue and thus revenue growth was actually 3% higher on a constant currency basis.

Google makes approximately 90% of its revenue from advertising. Thus the company is cyclically driven by the economic outlook. Advertisers are like sheep in that if they believe consumer demand will be less they hold on tight to their advertising budget. We saw this during the pandemic crash of 2020, as advertisers pulled spending, Google stock plummeted and most of Wall Street seemed to have forgotten about its dominant market position. I saw this as an opportunity to "load up the truck" and doubled my money on the stock in less than 6 months, before selling at all-time highs, which was a little lucky I must admit, although I was aware of the valuation.

This time the situation is similar, but we do have rising competition in advertising from TikTok. However, as someone who has used the TikTok Ads platform recently as part of a Localization Marketing plan, I found TikTok ads to be fairly basic. This makes complete sense as both Meta Platforms (META) and Google have had decades to build out best-in-class technology for advertising thus they are still dominant. Also I believe TikTok is more of a direct threat to Facebook or Meta as they are both social media companies. YouTube is classed as a social media platform, but I personally categorize the platform as the "next TV" with personalized channels and comments. YouTube has gained inspiration from TikTok with its YouTube Shorts offering which has proven to be popular with over 1.5 billion signed-in users watching the reels each month, according to Google CEO Sundar Pichai. However, YouTube shorts are notoriously difficult to monetize, which is an ongoing challenge Instagram is also facing.

Despite cyclical advertising revenue, Google Cloud has been the powerhouse platform that increased its revenue by a rapid 36% year over year to $6.3 billion. The cloud computing industry was worth an estimated $480 billion in 2022 and is forecasted to be worth over $1.7 trillion by 2029, growing at a rapid 19.9% CAGR.

This is driven by the number of large organizations or enterprises, outsourcing their IT to the "cloud". To put things simply, the "cloud" is just a series of data centers owned or rented by Google. The benefit of moving to the cloud is businesses can be more flexible, they don't need to buy expensive servers, and can focus on running their business. Google Clouds also has a data warehouse service called, Google BigQuery which enables companies to compile all their complex data together in one place. This then gives businesses the ability to run machine learning and AI on the "big data" in order to unlock new business insights. Google Cloud launched its Public Sector offering in June as it aims to help government agencies transition from legacy technology to the cloud.

To bolster Alphabet's security capabilities the company closed the $5.4 billion of acquisition of cybersecurity company Mandiant in September. This could also be a signal that Google is entering the cybersecurity market more broadly which I think would be an easy transition for the business, as they require security for their own vast infrastructure. The cybersecurity industry was worth $155.8 billion in 2022 and is forecasted to grow at a 13.4% CAGR to reach $376.3 billion by 2029.

Back to the financials, Alphabet generated Operating Income of $19.5 billion in Q2,22 which was fairly flat year over year. This was driven by the lower ad spend mentioned and increased investments into "technical infrastructure" such as servers according to CFO Ruth Porat.

The company has a "Fort Knox" balance sheet with $125 billion in cash and short-term investments, in addition to $14.7 billion in long-term debt.

I have plugged the trailing 12-month financial data for Alphabet into my advanced valuation model, which uses the discounted cash flow ("DCF") method of valuation. I have been conservative with my estimates and forecast just 10% revenue growth per year for the next 1 to 5 years.

Alphabet valuation (Created by author Ben Alaimo at Motivation2invest)

Alphabet valuation (Created by author Ben Alaimo at Motivation2invest)

In addition, I have forecasted margins to increase by ~2% to 34% over the next 5 years as Google's cloud business continues to grow rapidly.

Alphabet valuation 1 (created by author Ben at Motivation 2 Invest)

Alphabet valuation 1 (created by author Ben at Motivation 2 Invest)

Given these factors I get a fair value of $153 per share, the stock is trading at ~$100 per share at the time of writing and thus is over 30% undervalued.

As an extra data point, Alphabet is trading at a Price to Earnings Ratio = 19, which is 30% cheaper than its 5-year average. This also gives me faith in my valuation model given by relative and intrinsic valuations showing a similar discount.

Generally, I am a fundamental investor but I believe it helps to look at technicals as an extra data point when finding entry or exit points in a stock. In this case, we can see that Google stock is trading at a 52-week low of ~$99 per share. In addition, the Fibonacci Retracement indicator, which is the colored support lines to the left also shows support at ~$100 per share. However, if the stock breaks through that it will likely drop to "Buy point 2" of $86, which is the second support line and would represent a 13% decline. The next support line after that would be a $70/share buy price, which would be a 30% decline and a worst-case scenario in my eyes. Weighing up the risk/reward, I believe averaging down into the stock from Buy point 1, would not be a bad idea with expected short-term volatility.

Technical analysis Google (created by author Ben at Motivation 2 Invest)

Technical analysis Google (created by author Ben at Motivation 2 Invest)

The high inflation and rising interest rate environment have caused many analysts to forecast a recession. This is why we are seeing a major pullback in advertising spend across the board, which is impacting Alphabet's revenue. Thus I expect some volatility in the next couple of quarters but if you take a long-term view I believe advertising revenue will rebound like it always does.

Alphabet is one of the greatest companies on earth and a true powerhouse of the advertising industry. The company's revenue is cyclically driven but with Google Cloud achieving strong growth I expect this to get less over time. In addition, the business's "Moonshots" are gaining traction and some of these have such large upside such as Quantum computers and home robots that they only require a couple of winners, to generate major revenue in the future. The stock is undervalued intrinsically and although I expect volatility for the rest of 2022, over the next couple of years I forecast a solid rebound.

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Disclosure: I/we have a beneficial long position in the shares of GOOGL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.