Tesla vs. Google: Which Should You Buy?

Both may be mega-cap growth stocks, but only one is undervalued today.

Susan Dziubinski 21 February, 2022 | 1:46AM
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We’re pitting these two companies against each other to determine which is the better investment opportunity today based on a few of Morningstar’s proprietary metrics. Who wins this stock versus stock cage match? That depends on what Morningstar metrics matter most to you. Let’s run each company through a few of them.

Exhibit 1

Price/Fair Value Winner: Alphabet

Morningstar’s analysts calculate a fair value estimate for each stock they cover. The fair value estimate represents the intrinsic value of a stock, based on how much cash we think the company can generate in the future. A stock’s price/fair value is simply its current market price divided by the fair value estimate. A stock trading below 1.0 is undervalued; a stock trading around 1.0 is fairly valued; and a stock trading above 1.0 is overvalued.

As of this writing, we think Alphabet’s stock is about 25% undervalued, while Tesla’s stock is 23% overvalued. The winner from a price perspective is Alphabet; it is trading at a more attractive price today.

Uncertainty Winner: Alphabet

Morningstar's uncertainty rating represents the predictability of the company's future cash flows and, therefore, the level of certainty we have in our fair value estimate of a given company. Companies that enjoy sales predictability, modest operating and financial leverage, and limited exposure to contingent events carry low uncertainty; those with less predictable sales, significant 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 because we’re more confident in our fair value estimate of that stock.

Economic Moat Winner: Alphabet

The Morningstar Economic Moat Rating represents a company's sustainable competitive advantage. A company with an economic moat can fend off competition and earn high returns on capital for many years to come. A company whose competitive advantages we expect to last more than 20 years has a wide moat, one that can fend off its rivals for 10 years has a narrow moat, while a firm with either no advantage or one that we think will quickly dissipate has no moat.

Our analysts think Alphabet has carved out a wide economic moat, while Tesla has only built a narrow economic moat. Alphabet for the win 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 shareholder distributions. Analysts assign each company one of three ratings--Exemplary, Standard, or Poor--based on their assessments of how well a management team provides shareholder returns. Adept corporate managers can make a good company even better.

Both Alphabet and Tesla earn our top rating when it comes to capital allocation.

Overall Winner: Alphabet

At the end of the day, the “winner” of any cage match from Morningstar’s perspective is the stock that’s trading at the largest discount to our fair value estimate after being adjusted for uncertainty. The Morningstar Rating for stocks encapsulates just that. Stocks rated 4 and 5 stars are undervalued after being adjusted for uncertainty, stocks rated 3 stars are fairly valued, and stocks rated 1 or 2 stars are overvalued after being adjusted for uncertainty.

Alphabet earns a 4-star rating as of this writing, while Tesla earns a 2-star rating. Alphabet is the much better value today from Morningstar’s perspective.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Alphabet Inc Class A176.79 USD0.93Rating
Alphabet Inc Class C178.37 USD0.92Rating
Tesla Inc178.01 USD-2.44Rating

About Author

Susan Dziubinski

Susan Dziubinski  Director of Content for Morningstar.com

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