We pit these two companies against each other to determine which is the best investment opportunity today based on a few of Morningstar’s proprietary metrics. Who wins this stock vs stock cage match? It depends on which Morningstar metrics matter most to you. Let’s run every business through a few of them.
Price/Fair Value Winner: Alphabet
Morningstar analysts calculate a fair value estimate for each stock they cover. The fair value estimate represents the intrinsic value of a stock, based on the amount of cash we believe the business can generate in the future. The price/fair value of a stock is simply its current market price divided by the estimated fair value. A stock below 1.0 is undervalued; a stock trading around 1.0 is correctly valued; and a stock that is trading above 1.0 is overvalued.
As of this writing, we believe Alphabet’s stock is around 25% undervalued, while Tesla’s is 23% overvalued. The winner from a price point of view is Alphabet; it is trading at a more attractive price today.
Uncertainty Winner: Alphabet
Morningstar’s uncertainty rating represents the predictability of a company’s future cash flows and, therefore, the level of certainty we have in our estimate of a given company’s fair value. Companies that benefit from sales predictability, modest operating and financial leverage, and limited exposure to contingent events have low uncertainty; those with less predictable sales, high leverage and significant exposure to contingent events carry higher uncertainty.
Our analysts think Alphabet’s cash flow uncertainty is high, but Tesla’s uncertainty is even higher. Alphabet wins for its relatively lower uncertainty as we are more confident in our estimate of the stock’s fair value.
Economic moat winner: Alphabet
The Morningstar Economic Moat Rating represents a company’s sustainable competitive advantage. A business with an economic moat can fend off the competition and earn high returns on capital for many years to come. A company whose competitive advantages we expect to last for more than 20 years has a wide moat, one that can fend off rivals for 10 years has a narrow moat, while a company with no advantage or one that we believe will dissipate quickly did not ditch.
Our analysts believe that Alphabet has carved out a large economic moat, while Tesla has built only a weak economic moat. Alphabet for victory on this metric.
Capital Allocation Winner: Tie
The Morningstar Capital Allocation Rating represents our assessment of how well a company manages its balance sheet, investments and distributions to shareholders. Analysts assign each company one of three ratings (Exemplary, Standard or Poor) based on their assessment of how a management team delivers returns to shareholders. Skilled business leaders can make a good business even better.
Alphabet and Tesla get our highest rating for capital allocation.
Overall Winner: Alphabet
Ultimately, the “winner” of any cage match from Morningstar’s perspective is the stock that trades at the largest discount to our estimate of fair value after adjusting for the ‘uncertainty. The Morningstar Rating for Stocks sums up exactly that. Stocks rated 4 and 5 stars are undervalued after adjusting for uncertainty, stocks rated 3 stars are fairly valued, and stocks rated 1 or 2 stars are overvalued after adjusting for uncertainty.
Alphabet gets a 4-star rating at the time of this writing, while Tesla gets a 2-star rating. Alphabet is the much better value today from Morningstar’s perspective.