Alphabet's Q3Free Cash Flow Surges - Options Activity Provide Good Income Plays

Alphabet Inc. (GOOG, GOOGL) reported strong Q3 revenue and free cash flow (FCF) growth on Oct. 29. Its FCF margin surged to 20%, up from 16% in Q2. This could push the value of GOOG stock up to $3 trillion over the next year and $244 per share, which implies it could rise 40% more. 

GOOG closed at $171.14 on Thursday, Oct., 29, but after hours the stock is up +6.0% today to over $18` per share. I recently wrote in Barchart that if Alphabet's Q3FCF margins exceeded 16% GOOG stock could rise. 

This was in my Oct. 27 Barchart article, “What to Expect with GOOG Stock Ahead of Alphabet's Upcoming Earning Release.” I argued that any free cash flow (FCF) result that was over $16 billion would be bullish for GOOG stock.

Moreover, Barchart reports today that GOOGL and GOOG options are trading in heavy volumes. GOOG options provide good income opportunities and buy-in target prices for cash-secured short-put options players.

Strong Revenue and Free Cash Flow (FCF)

As it turned out, Alphabet reported 15% YoY higher revenue at $88.3 billion, and its free cash flow (FCF) exceeded $17.67 billion. The table below shows that this increased its FCF margin for the quarter to 20%, up from almost 16% in Q2.

Alphabet quarterly results, Q3 vs. Q2 2024 and Hake analysis

That strong result was driven by a 13% YoY rise in Google Services sales, led by strength from Google Search & Other, as well as from Subscriptions, platforms, devices, and YouTube.

Moreover, Google Cloud revenue rose 35% YoY.  In addition, its operating margins stayed strong at 32%, comparable to last quarter. 

However, the table above shows that free cash flow surged from $13.45 billion in Q2 to over 17.6 billion, even though capex spending was relatively flat.

This means Alphabet squeezed out more cash savings and cash flow from its existing operations with higher revenue. That is what operating leverage is all about. Higher revenue, stable costs, and stable capex spending, will push Alphabet's cash flow exponentially higher.

This will have a huge effect on the company's value going forward.

What GOOG Stock Could Be Worth

Analysts project that Alphabet's revenue will rise to $386.6 billion next year. So, if the company can maintain at least at 19.5% FCF margin, its free cash flow could reach $75.387 billion (i.e., 0.195 x $386.6b).

Moreover, after the strong Q3 results, the sell-side Wall Street analysts covering the stock may raise their revenue forecasts. That could push FCF and its FCF margin even higher.

But, just to be conservative, let's assume Alphabet makes $75 billion in FCF next year. Therefore, using a 2.5% FCF yield metric, which is its average, Alphabet stock could eventually rise to have a $3 trillion market value (i.e., $75b/0.025 = $3,000 billion).

That value is 43% over Thursday's closing market value of $2.086 trillion, and 35.7% over its after-hours $2.21 trillion market cap. In other words, GOOG stock could be worth 35.7% more than its $180 stock price - i.e., $244 per share.

How To Play This

Analysts will likely raise their price targets over the next week. That could also help push the stock higher.

In my last article, I wrote that one way of playing this is to sell short out-of-money (OTM) put options in nearby expiration periods. For example, I suggested shorting the $155 strike price put option expiring Nov. 15. That premium has already fallen from $2.00, which provided a 1.29% yield to short-sellers, to just $1.25 today. Although it's made investors a good deal of money, the yield is now just 0.80% (i.e., $1.25/$155.00).

It makes sense for new investors to short the Nov. 22 $160.00 strike price put, which has a bid price of $2.10. That provides short-sellers a 1.31% immediate yield (i.e., $2.10/$160.00).

GOOG puts expiring Nov. 22 - As of Oct. 29, 2024

 Moreover, this play works best for existing investors, as they make money both by selling the OTM puts and also if GOOG stock keeps rising.  GOOG stock, after all, looks very attractive here for value investors over the next year, as I have shown.

This is what could be attracting investors in heavy options activity as reported by the Barchart Unusual Stock Options Activity Report.

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On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.