Up 41.5% in a year, here’s why Alphabet is one of my top stocks to buy

Our author thinks Alphabet is one of the best stocks to buy. He says its undervalued, highly profitable and has a lot of future growth potential in AI.

| More on:
Google office headquarters

Image source: Getty Images

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.

My research suggests to me that the market significantly undervalued Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) in early 2023. Now, the price is up almost 42% in just a year. While the amazing value opportunity might not be there anymore, I still think the shares are cheap. Here’s why Alphabet is one of my top stocks to buy at the moment.

Continuing to pioneer

It isn’t just a search engine now. These days, the company is involved in AI, cloud operations, YouTube, Waymo (autonomous vehicles), and health and biotechnology. The firm is an expansive technology holding company responsible for one of the most important digital ecosystems on the planet.

I think CEO Sundar Pichai did the right thing by pivoting the company to focus on AI. But now, Google is being slightly undervalued for its potential in the area because of competition from the likes of OpenAI’s ChatGPT. That puts Microsoft and Google head-to-head, as Microsoft is a big shareholder in OpenAI.

However, even given the competition, I think there’s room for many big AI companies to succeed. I also think Google will continue to be one of them for a very long time.

Assessing the financials

Alphabet’s revenues continue to grow strongly, with a 10-year median of 22%. Additionally its earnings without non-recurring items have been growing at a 10-year median of 26.5%.

Another element I really like about the company is its balance sheet. At the moment, it holds a lot more equity than liabilities.

Also, its free cash flow margin of nearly 22% is very strong. Free cash flow is a key measure of a company’s real earnings because it includes all expenses and investments, showing how much cash is actually available. This is important for things like paying dividends, buying back shares, reducing debt, or reinvesting in the business.

Still a value opportunity

Even after this year’s price growth, I think the shares are still appealing for me to buy right now. The primary reason I think this is that Alphabet is in a very rare situation.

Most big tech companies trade above what I would consider intrinsic value, which is the actual worth of a business estimated by forecasting earnings or cash flows. However, that’s not the case with Alphabet shares.

Based on my model, the business looks undervalued by roughly 20% right now. That’s an amazing opportunity, in my opinion, and I’m planning to increase my stake accordingly.

Always acknowledging the risks

Even though the investment looks compelling to me right now, I think the competition from other firms is rising, and I need to consider that.

One company I feel the market has undervalued for its future impact on AI right now is Tesla. If Elon Musk decides to undercut Waymo in price and offer a more expansive fleet of autonomous vehicles, it would affect Alphabet shareholders.

Also, let’s not underestimate ChatGPT. I think it could endure as the leading AI software company for some time. The firm will have to navigate to create a unique position in the market accordingly.

It’s a buy for me

Putting all of this into perspective, I think Alphabet is far and away a long-term Buy for me. I love the business, and I can’t wait for my stake to potentially grow over many decades.

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. Oliver Rodzianko has positions in Alphabet, Microsoft, and Tesla. The Motley Fool UK has recommended Alphabet, Microsoft, and Tesla. 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

Person holding magnifying glass over important document, reading the small print
Investing Articles

3 UK stocks I reckon could benefit from the upcoming general election

As the general election hurtles towards us, this Fool wonders which UK stocks could benefit, and focuses on three picks…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

At 11%, this dividend share pays the biggest yield in the FTSE 100

When a dividend share offers a big yield, we need to be cautious of the risks. But I reckon this…

Read more »

British Isles on nautical map
Investing Articles

I reckon Hiscox shares could be one of the best bargains on the FTSE

I've been investing in FTSE companies for years, but after a major decline I've not seen a company with as…

Read more »

Grey Number 4 Stencil on Yellow Concrete Wall
Investing Articles

4 reasons I’d still buy National Grid shares in a heartbeat despite the recent wobble!

As National Grid shares plunged on the news of a right issue, I’m not flinching, and reckon it's a top…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

After gaining 45% in 12 months, is the Amazon share price now overvalued?

Our author thinks the Amazon share price might be too high. While the long-term future of the business looks bright,…

Read more »

Investing Articles

2 hot dividend stocks I’d buy and hold for 10 years

Our writer reckons these two dividend stocks could help her bag juicy dividends for years to come and explains why.

Read more »

British Pennies on a Pound Note
Investing Articles

2 dividend-paying penny shares I’d happily own

These two penny shares have caught our writer's eye for a combination of income prospects now and business growth potential…

Read more »

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

This FTSE 250 share looks like a bargain to me!

This FTSE 250 share has seen its price tumble due to chaotic local economic conditions in a key market. But…

Read more »