This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
It's been an interesting year for the "Magnificent Seven" stocks, a name given to Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), Apple, Microsoft, Nvidia, Amazon, Meta Platforms, and Tesla because of their size and influence on the market. Big tech stocks have been on a roller-coaster ride thanks to the Trump administration's revolving tariff plan, economic question marks, and investors shifting to defensive and dividend stocks to hedge against a potential downturn.
Although Alphabet hasn't experienced the worst drop this year (that honor goes to Tesla and Apple), it appears to be the most undervalued of the bunch after its recent declines. It's now approaching "too cheap to ignore" territory.
Just how cheap is Alphabet's stock?
There are several metrics you can use to determine the relative value of a stock. In this case, I want to look at Alphabet's forward price-to-earnings ratio (P/E). This essentially tells you how much you're paying per $1 of its earnings. The higher the P/E ratio, the more expensive a stock is. The forward P/E ratio tells you how much you're paying per $1 of a company's projected earnings over the next 12 months.
The P/E ratio itself won't tell you if a stock is undervalued because what's considered "high" and "low" depends on the industry. However, comparing similar companies in the same industry can give you an idea, and when comparing Alphabet to other "Magnificent Seven" stocks, it appears undervalued.
TSLA PE Ratio (Forward) data by YCharts.
For some perspective, Alphabet's average P/E ratio over the past decade is around 29.7. Over the past five years, it's been around 25.5. Even the S&P 500 is currently trading much higher at 28 times earnings.
Why is the market valuing Alphabet so low?
Much of the skepticism surrounding Alphabet is related to the growth of tools and apps like ChatGPT and TikTok and if this will affect how frequently people use Google Search. For quite some time, when you had a question you needed answered, you'd ask Google and be led to a website that ideally had the answer. Now, you can ask ChatGPT and receive an instant, descriptive answer, or type it into TikTok and watch a short, engaging video on the topic.
Google Search -- which was 56% of Alphabet's $90.2 billion in revenue in the first quarter -- makes money when people click on sponsored links and ads, so you can see how reduced usage wouldn't be ideal. However, Alphabet has tried to address this issue by integrating its own AI tools into Google Search.
Investors may be skeptical about whether Google Search can maintain its dominance (or monetize its new AI Overviews feature), but those concerns seem overblown when considering how the market is currently valuing Alphabet. Its revenue growth is still in line with what it's been over the past couple of years.
GOOGL Revenue (Quarterly YoY Growth) data by YCharts.
Alphabet is more than just Google Search
There's no question that Google Search is Alphabet's bread and butter, and that will likely be the case for the foreseeable future. However, other segments, such as YouTube, Google Cloud, and Waymo, have been growing impressively.
Google Cloud, in particular, has the potential to become a major revenue source for Alphabet in the future. In the first quarter, it made $12.3 billion in revenue, up 28% year over year. Google Cloud likely won't catch up to Amazon Web Services or Microsoft Azure in market share anytime soon, but the cloud industry, in general, is growing so much that there's plenty of money to be made without being the dominant leader.
There may be questions surrounding Alphabet, but it has a robust business and is here to stay. At its current trading price, Alphabet stock is too cheap to ignore.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
