Why Now Is a Great Time to Buy Alphabet

The best time to buy a stock is when pockets of opportunity present themselves when strong free cash flow-generating companies, backed by strong financial positions, suddenly fall out of favor with emotional investors.

Alphabet (GOOGL) - Get Report is one such company. And it trades cheaply any way investors rationally appraise it.

Background to the Opportunity

Despite terrific operational execution Alphabet's share price has largely traveled sideways in the past 12 months. Moreover, Alphabet has continued to steadily increase the company's loyal following, imprinting itself in the minds of users all over the world as a trusted brand, and continues to generate strong free cash flow.

However, the past 12 months have seen Alphabet's share fall out of favor with investors, offering a strong opportunity for contrarian investors looking to invest with a large margin of safety.

Alphabet at the Core

More than 85% of Alphabet revenue is derived from advertising. This is Alphabet's bread and butter. This is what investors should be thinking of when they weigh whether or not to invest in Alphabet.

Interestingly, many analysts and investors have issues with Alphabet's lack of transparency and disclosures. But what keeps users engaged with Alphabet's platform? It is Alphabet's consistent ability to predict what information will be useful to its users and making it accessible before it even becomes a need for its users -- hence the need for opacity. In other words, by working under secrecy, it kills the potential for meaningful competition to dislodge Alphabet's hold on its users.

Over its 20 years of existence, Alphabet has continued to solidify its presence with advertisers. In a continual effort to be the go-to platform for advertisers, Alphabet has been heavily investing in machine learning. This technology works together with advertisers to optimize their messages in order to increase the responsiveness from their search ads. Said another way, Alphabet's technology ensures that advertisers not only reach the right consumers at the right time, but together delivers to advertisers a high return on investment.

A Rock Solid Financial Position 

Solving problems for your customers is often a very financially rewarding endeavor. This is reflected in the fact that Alphabet's balance sheet carries close to no debt, and has a net cash position of just over $100 billion. In other words, roughly 13% of Alphabet's market cap is made up of cash.

And crucially, while many other companies have a history of destroying value with their management's ineptness at adequately dealing with their strong cash flow streams, Alphabet remains highly disciplined with its capital allocation. In fact, even Alphabet's vanity side projects, reported separately under Other Bets, do not cause any material cash burn.

So What Troubles Investors?

In a word, Amazon (AMZN) - Get Report . Investors have come to wrongly believe that Amazon will succeed in disrupting the need for consumers brands companies to advertise with Google. However, let's boil down the facts. At present, Amazon's advertising revenue accounted for less than $2.5 billion as of Q3 2018, which compares with roughly $29.0 billion of revenue for Alphabet over the same time period. More to the point, Amazon's hold in this space is less than 10% that of Alphabet's.

My argument here is that this is a lot of noise from Amazon and a lot of distraction for investors.

Valuation -- The Best For Last

Alphabet's long runway ahead and clear track record of being highly free cash generative is being dismissed by investors. Furthermore, Alphabet continues to grow with a compounded annual growth rate in the high teens. Yet presently, Alphabet is one of the most undervalued tech stocks amongst its peers.

As the above table shows, Alphabet not only trades at a discount relative to itself, but it also at a discount to some of its peers. In more detail, we can see how Alphabet cash flows from operations (16.8x) trades meaningfully cheaper than both Amazon (31.0x) and Twitter TWTR (21.0x).

The Takeaway

Alphabet continues to increase its competitive advantage over the competition. In fact, there's no meaningful competition on the horizon, as the brand continues to solidify its trust with consumers and companies alike. And finally, and arguably most important, it is quite clearly undervalued at the moment and should reprice higher over time once positive investor sentiment returns to Alphabet.

Alphabet and Amazon are holdings in Jim Cramer'sAction Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells GOOGL or AMZN? Learn more now.