When searching for, well, anything, many people turn to Google. But when searching for shares to buy, not everyone necessarily thinks of Google parent Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). Over the past few years, at various points I have felt that Alphabet stock was not attractively priced.
In recent months, though, the company’s shares have been performing strongly.
Here is what my position would be if I had invested £500 in Alphabet stock a year ago, at the start of last June.
So far in 2023, Alphabet stock has performed strongly. But what about the past year? After all, the recent moves up are largely reversing falls we saw in the second half of last year as investors assessed the risks that artificial intelligence (AI) might pose to demand for search services.
Here is the Alphabet stock chart.
The one-year movement in the share price is 9% growth. If I had invested £500 in Alphabet stock a year ago, my holding would now be worth around £545.
The tech giant does not pay dividends. That means that the change in the value of my investment would reflect only a shifting share price, not any dividend income.
Will that last?
Not necessarily. Alphabet is hugely profitable. For now it can hang on to some of those earnings in cash and reinvest others in growth areas. For example, it might spend on developing AI tools to help the core search business remain competitive, as well as investing money in less-developed areas like self-driving cars.
Ultimately, though, if Alphabet continues to throw off huge amounts of cash and cannot show that it has a good use for it, shareholders may pressurise the business to pay dividends. Tech rival Apple did not pay a dividend for decades but now pays one, which has been steadily growing. The same could happen at Alphabet at some point in the future.
Buy and hold
At its current valuation, I do not plan to add any more Alphabet stock to my portfolio.
As a buy-and-hold investor, I like investing for the long term in companies I think have strong commercial prospects. But valuation also matters. Even a great company can make a middling or poor investment depending on the price one pays for its shares.
Alphabet stock has looked cheap at some points over the past year – and I bought some for my portfolio. But its current price-to-earnings ratio of 28 does not look cheap to me, especially as Alphabet faces risks to its earnings in coming years such as weak advertising spend. Indeed, its net income declined in the first quarter, falling 8% compared to the same period last year. For now, I have no plans to buy more Alphabet stock.