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GOOGL stock (Alphabet Class A stock) showed large unusual options activity, mostly near-term in- and at-the-money (ATM) put trades, on Wednesday, Nov. 22. This could be an intricate income play.
This was highlighted in a unique Barchart report called the Unusual Stock Options Activity Report. For example, 5 of the 6 large options tranches were in- and at-the-money put option trades for near-term expiration periods, including this Friday, Nov. 24, Dec. 1, and Dec. 15. There was also one large call option tranche for expiration on Dec. 15, slightly out-of-the-money.
A large institutional investor might have done these trades trying to take advantage of slow trading action on Friday. The market will close early on Nov. 24.
Moreover, the large options trades were significantly larger than the normal outstanding contracts in the various tranches. This can be seen in the “Vol/OI” (i.e., Volume/Open Interest) column in the table below. This is a summary of a snapshot of the Barchart report taken in the morning of Nov. 22.
So what is going on here? Is GOOGL stock undervalued and is it worth copying some of these trades?
Where Things Stand with Alphabet Stock
Alphabet released excellent Q3 results on Oct. 24. For example, revenue was up 11% YoY on a constant currency basis (i.e., excluding the effects of foreign exchange volatility). However, the $76.69 billion in Q3 revenue was even 2.8% higher than the prior quarter (Q2 2023) revenue of $74.6 billion.
Moreover, its free cash flow (FCF) produced during Q3 was $22.6 billion, up 40.6% YoY from the 2022 Q3 FCF of $16.077 billion. This was even 3.77% higher than last quarter's (Q2 2023) FCF of $21.778 billion.
Even more impressive was that its FCF margin (i.e., FCF/total revenue) stayed very high at 29.5% (i.e., $22.6b/$76.69b in total revenue).
Moreover, it surged higher compared to last year's 23.3% FCF margin (i.e., $16.077b/69.09b). The Q3 FCF 29.5% FCF margin was even slightly higher than the prior quarter (Q2 2023) FCF margin of 29.2% (i.e., $21.778b/$74.6b).
In other words, the company's key financials are still showing growth.
GOOGL Stock Stalled
Yet investors always want to see more gains than what came from Alphabet. That could be one reason why GOOGL seems to have stalled. For example, since Oct. 24 when the Q3 earnings came out, GOOGL stock has stayed flat. It was at $138.81 on Oct. 24 and today the stock is at $138.11.
That might be what is influencing all these close-to-the-market-price strike-price option plays.
As a result, an investor might have cobbled together a complicated debit and credit option play to make incremental income. This means that this might not be all that profitable to try and copy a complicated options income strategy.
GOOGL Stock Still Looks Undervalued
Most investors might just consider holding their position in GOOGL stock if they are long.
One reason is that GOOGL stock still looks undervalued. For example, analysts surveyed by Seeking Alpha forecast next year's revenue will grow by 11.2% to $340.22 billion, up from $305.7 billion this year.
Using a 30% FCF margin we can estimate that its FCF will exceed $100 billion in 2024 (i.e., $340b x 0.30 = $102b). That implies, using a 4% FCF yield (i.e., the same as a 25x FCF multiple), that its market cap could rise to $2.55 trillion (25x $102b).
This is 44% higher than the stock's present $1.75 trillion market cap. In other words, it's possible that next year we could see GOOGL stock rise 44% close to $200 per share (i.e. $138.11 x 1.44 = $198.87).
Even a more conservative valuation using a 5% FCF yield (i.e., 20x FCF) produces a target market cap of $2.04 trillion (i.e., $102b x 20 = $2.55 tr). That implies a 15.3% gain in GOOGL stock to at least $159.24 per share.
In other words, we could see the stock rise anywhere from 15% to 44% next year, or 30% on average to $180 per share. That shows that GOOGL stock looks like a good play for long-term investors. The bottom line is this: don't get too caught up in intricate short-term options plays with GOOGL stock.
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.
