As we discussed yesterday, the latest US earnings season has just kicked off across the Pacific. There are plenty of US stocks that are worth keeping an eye on, whether they be Berkshire Hathaway, Coca-Cola, or Costco. But it's normally the Magnificent 7 stocks that have the most eyeballs on them.
The Magnificent 7 are the US tech stocks that dominate the US markets and many aspects of our daily lives. They are Apple, Microsoft, NVIDIA, Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), Amazon, Meta Platforms, and Tesla.
All seven of these companies have been phenomenal investments in recent years. Nvidia, in particular, stands out with its 1,400% gain since late 2022.
The Magnificent 7 will not begin reporting their latest quarterly earnings until next week. Tesla and Google-owner Alphabet kick things off next Wednesday, 23 July. They will be followed by Apple, Meta, and Microsoft the following week, with the others trickling in after that.
There's one Magnificent 7 stock that I'll be watching more than the rest this earnings season, though. That will be Alphabet.
Alphabet is cheap compared to the other Magnificent 7 stocks
Alphabet, best known for its flagship Google Search business, as well as YouTube, is a major holding in my own portfolio. However, I also own most of the other Magnificent 7 stocks, too. So why does Alphabet hold special significance this earnings season?
Well, it's the Magnificent 7 stock that is arguably the most unloved at the moment.
Most of the seven currently trade at relatively rich valuations. To illustrate, Microsoft, Amazon, and Apple currently trade on price-to-earnings (P/E) ratios well over 30. Nvidia is over 50, while Tesla is on a lofty 174.
But Alphabet's Class A stock (GOOGL) is sitting on an earnings multiple of just 20.57 today. That's less than Commonwealth Bank of Australia (ASX: CBA), Woolworths Group Ltd (ASX: WOW), and Telstra Group Ltd (ASX: TLS).
That arguably prices Alphabet as if it is no longer growing. But that's not the case at all. In its last quarterly earnings, reported in April for the three months to 31 March, Alphabet revealed its revenue was up 12% year on year to US$90.23 billion. The company's net income was up an even more impressive 45.97% to US$34.54 billion, while earnings per share rose 48.68% from US$1.89 per share to US$2.81.
Those are numbers that CBA, Telstra, and Woolies could only dream of.
Alphabet has been growing its dividends quickly, too, while also regularly buying back its own stock.
And this is a company with a P/E ratio of 20.57.
Why are investors panicking?
The market is clearly panicking on Alphabet, or at least factoring in a major threat to its underlying business. There seems to be an assumption that the rise of artificial intelligence (AI) tools fundamentally threatens Google Search's dominance and, by extension, the lucrative advertising revenue that it elicits.
I am no expert in AI, and am certainly not going to try to predict how it will transform how we collectively search for information in the future. However, what I do know is that Alphabet is itself a major AI player. Its Gemini platform is well-regarded and is being integrated into broader search functions.
In addition, Search is not the only arrow in Alphabet's quiver. While it might bring in the lion's share of Alphabet's revenue, the company still has plenty of other promising ventures. YouTube is highly profitable, and many investors are excited about the potential of the Waymo autonomous driving division.
So this earnings season, I'll be watching to see if there are any signs that Alphabet's core business is under threat. If the company posts another stellar set of numbers, it will signal, to me at least, that the market's fears might be overcooked.
