Why Did Alphabet Stock Pop Today, Then Drop?

Key Points

• Canada has rescinded a threatened Digital Services Tax, which would have hurt Alphabet's profits.

• That's good news for Alphabet stock.

• The bad news: Alphabet stock is pretty expensive.

• 10 stocks we like better than Alphabet ›

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) stock is acting a bit erratic Monday morning, first rising nearly 2% in early trading, and then giving up all its gains and falling into the red. As of 11:05 a.m. ET, the Google parent company is down 0.3%.

And why?

Good news from Canada

The "up" part of this story is easier to explain than the "down." On Sunday, Canada announced it will rescind a proposed Digital Services Tax (DST) that threatened to impose high costs on tech companies like Google. The DST was designed to extract revenue from companies providing social media, advertising, and data services (so basically, Google).

But President Trump specifically called out the DST as an obstacle to reaching a new trade agreement with Canada. So yesterday, Canada rescinded the DST, hoping this will help move along the trade talks.

That's good news for Google parent Alphabet, and explains why the stock popped early today.

Is Alphabet stock a sell?

It's less clear why investors have so quickly abandoned their optimism about the DST repeal, however, and have turned to selling Alphabet stock.

Valuation might be a concern. Although Alphabet reported earnings as calculated according to generally accepted accounting principles (GAAP) of more than $110 billion over the last 12 months, the company's still spending heavily on its artificial intelligence (AI) efforts. Those may work out, they may not. One thing that's certain though is that the work is costing Alphabet massive amounts of capital expenditure that reduce its free cash flow to less than $75 billion.

That means for every $1 Alphabet reports as GAAP "profit," it's actually making just $0.67 in real free cash flow. At a price-to-free cash flow valuation of nearly 29, Alphabet stock looks more like a "sell" than a "buy" to me.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.

Why Did Alphabet Stock Pop Today, Then Drop? was originally published by The Motley Fool