Arrows in the parent company of Google alphabet (NSADAQ: Googu) Trade (forward) the price ratio to profits (P/E) from 17. Based on the past five years, this is unusually low.

Work grows well and stocks appear as irrational. But I have a brain, so I was trying to use it to find out why the market is more positive in the stocks.

Anti -monopoly

The biggest and most obvious cause is anti -monopoly. The alphabet was convicted of maintaining illegal monopoly and the question is what is happening after that?

One of the ideas is that nothing will happen much, so the arrows that decreased by 8 % this year are the opportunity to buy. But I think this is a dangerous line of thinking.

As I see it, things may turn well – and not all are not bad. Do not pay apple 20 billion dollars for the privilege of being an iPhone search engine may be a welcome development.

On the other hand, the company whose operations have to strip a major problem. Even if this is unlikely, the size of the risk means that investors should not be satisfied.

Criticism generation

The least obvious anxiety is Alphabet as a cash machine. The company has a good reputation in strong free cash flows with low capital expenditures, but things have changed recently.

In 2015, the company produced $ 16.5 billion for free using less than 24 billion dollars in fixed assets – 69 % yield. But over the past 12 months, this has decreased to about 41 %. The reason is Alphabet on artificial intelligence (AI), which may pay fruits in the future. If so, the increase in capital expenditures will be an investment, not a cost.

However, investors should note the effect this causes on the company’s cash flows in the short term. This also weighs the image of the evaluation with the inventory at the present time.

evaluation

The 2 -dollar market value means $ 75 billion in annual free cash translate into a return of 3.75 % per year. But there is something else that investors need to think about evaluating the alphabet shares. The company is currently about $ 23 billion annually from stock -based compensation. This is the value of the shares that the company’s problems use to pay its employees.

These are not cash, so do not weigh a free cash flow. But Alphabet must purchase them to prevent the number of shares and reduce the value of their current shares.

Put this in papers about $ 52 billion in free cash annually-2.6 % return on CAP $ 2TRN. The company’s growth horizons may justify this, but I do not think it makes the arrow irrational.

The opportunity to buy?

Alphabet shares are traded in P/E unusually low. Although this may make them look a clear opportunity, there are many investors to think carefully.

There is continuous legal uncertainty, higher capital expenses, and high -level compensation costs. All of these are real issues that must be taken into account.

None of these means automatically that the stock will not be a good investment. But for anyone wondering why the arrow looks cheap, I think there are clear reasons.