Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) has had an extremely good year. GOOG stock is up 67.2% year-to-date. It closed at $2,928.96 on Dec. 28 after having closed last year at $1,751.88 per share.

As I wrote recently, the stock still looks extremely undervalued. This is based on both analysts’ estimates for revenue next year and its ability to generate huge amounts of free cash flow (FCF).

Based on its amount of FCF generating capability, GOOG stock is worth significantly more. Based on my analysis it is worth $4,024 per share, or 37% more than today’s price.

Where Things Stand for Alphabet
Analysts forecast that next year’s revenue will rise to $297.21 billion, up from estimates of $254 billion for this year. That represents a revenue growth rate of 17%. For such a large company, this is a very high growth rate. It also virtually guarantees that the company will make more FCF.

We can estimate its FCF next year by using its FCF margins. To do this, we estimate the FCF margin for next year and then apply it to revenue estimates for next year.

For example, on page 7 of its earnings release dated Oct. 26, Alphabet reported that it made $18.72 billion in FCF. This is rare for a company to delineate its quarterly free cash flow, but we should consider this a gift to investors. It will help us produce a clean forecast for its FCF next year.

Based on its quarterly revenue of $65.118 billion for the third quarter (Q3), Alphabet made a FCF margin of 28.75% (i.e., $18.72b/$65.118b). Moreover, this is up significantly from its average FCF margin of 20.4% for the past nine months.

Therefore, we can assume that next year the company will make at least a 27% FCF margin for the whole year. That is a conservative estimate going forward, assuming that some quarters will have a lower than average FCF margin than the 28.75% margin from Q3.

Based on this, we can estimate that the total FCF next year will be $80.4 billion. This is the result of taking 27% of $297.8 billion in 2022 revenue forecasted by analysts. This $80.4 billion FCF estimate can be used to produce a target price for GOOG stock.

Estimating a Value for GOOG Stock
One way to use this estimate for next year’s FCF is to apply an FCF yield metric to it. For example, if we use a 3% FCF yield and divide $80.4 billion in forecast FCF by 3%, we get a target market value of $2.68 trillion.

Compared to its present market value of $1.95 trillion, Alphabet’s forecast market value is 37.4% higher (i.e., 2,680 billion / $1,950 billion-1 = 37.4%).

This also implies that GOOG stock could be 37.4% higher, or $4,024 per share (i.e., 1.374 x $2,928.96). This puts the stock over $4,000 per share in value for the first time.

Other analysts are not as positive as I am. For example, Seeking Alpha’s survey of 48 analysts shows that their average price target is just $3,366.36 per share, or just 14.9% higher. That seems like too low a price target, especially given that the stock performed so well this year based on its powerful FCF production.

Similarly, TipRanks reports that 28 analysts have an average target price of just $3,368.75, very close to the Seeking Alpha price. That implies a similar 15% upside target for next year for GOOG stock.

Normally I would say this: let’s take an average of my price target and the analysts’ price target. But I feel strongly that the company is likely to do extremely well next year. This is based on its expected strong FCF performance. So, my best target price for GOOG stock is $4,024, or 37% above today’s price.

— Mark R. Hake

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Source: Investor Place