Why I think Alphabet shares are great value

Alphabet shares have lost a quarter of their value over the past year. Our writer explains why he sees this as a buying opportunity for his portfolio.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Warren Buffett at a Berkshire Hathaway AGM

Image source: The Motley Fool

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Google can be very helpful when you want to search for things. But parent company Alphabet (NASDAQ: GOOG) has not been much help for investors searching for good returns lately. Over the past year, Alphabet shares have lost 25% of their value.

I think they offer great value for my portfolio though, and would consider buying them now if I had spare money to invest. Here is why.

Long-term investing

I am not a short-term trader trying to predict swings in market prices. Instead, I am a believer in long-term investing. I aim to buy small stakes in great companies I think have outstanding business prospects over the course of years or even decades.  

The benefit of such a long-term approach is not just that it can take time for investors to fully appreciate the potential of a company. Rather, it reflects the fact that a great business model can get even better over time, thanks to economies of scale.

For example, building the digital architecture for a service like Alphabet’s YouTube takes significant resources. But once it is up and running, the marginal cost of adding new users is small relative to the potential rewards.

In the same way, if YouTube decides to extend five second adverts to 10 seconds, what would happen? Some users might leave, but I reckon many of them would keep watching – and the platform could earn a lot more from the adverts than before.

The shares and the value of a moat

As I said, it is the long-term potential of the Alphabet business model that attracts me. Billionaire investor Warren Buffett talks about the advantage of a business having a moat. By that he means a competitive advantage that can help give it pricing power. YouTube demonstrates this perfectly, just as the core Google service does. An installed base of users the business understands well and who know how to use its products is a massive business asset.

Alphabet works to keep them through everything from thoughtful interface design to technical reliability. But key to its business prospects is the fact that it enjoys a massive moat. Indeed, Buffett has publicly said he made a mistake by not investing in Alphabet, even though he saw the potential in the business. “We blew it” he has told shareholders in Berkshire Hathaway.

Why I see value

If the business is as good as I think though, why have Alphabet shares been falling?

Partly it reflects some of the challenges the business faces. For example, as many countries face a recession, companies may cut back their advertising budgets. That could hurt sales and profits at Alphabet, for whom advertising is a key source of revenue.

But in the long term, I see Alphabet as a company whose technology, user base and brands give it an outstanding business moat. I think that could help it produce very strong earnings long into the future.

On that basis, I think the current price-to-earnings ratio of 19 might offer me excellent value as a long-term investor.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Alphabet (A shares) and Alphabet (C shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »