Back in December, the price of Google parent Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) was quite a bit higher than it is now. Even after some recent rises, Alphabet stock is still 17% cheaper now than it was in December.
I have been looking for cheap tech stocks to buy and Alphabet is not the only one that has caught my eye.
While Microsoft is close to an all-time high, Nvidia is below recent highs, and Meta is 14% cheaper than in December.
These are no longer the sort of potential bargains we saw last month, but compared to recent highs a number of leading tech stocks are on sale right now – is it time for me to buy some?
Valuation challenges in the current market
Nvidia still looks pricy for me on its current valuation, while I will not touch Meta because of ethical concerns about the harms of social media.
Alphabet though has definitely caught my eye.
It currently trades on a price-to-earnings (P/E) ratio of 19. Now, that does not shout ‘screaming bargain’ to me. But it is the sort of P/E ratio I would be willing to pay for shares in a great business, if I felt its prospects were strong enough.
Here though is where we come to the rub with valuations. Part of the reason tech stocks have been on such a wild ride in recent years is the uncertain impact of artificial intelligence (AI). Alphabet is a perfect example of this.
The company’s tech savviness means that AI may offer it fewer immediate benefits than a company that wants to digitalise tasks previously done by workers. Still, AI could potentially offer a lot of new revenue streams to the company. After all, it has a huge customer base, a deep understanding of them and already forms an integral part of many of their lives.
But on the flipside, search remains the core of Alphabet’s business. If AI (from Google or a competitor) can largely supplant the need for users to make search queries, Alphabet’s key revenue stream could collapse. That is a large risk, in my view, which helps explain why Alphabet trades on what I see as a fairly attractive valuation.
I’ll keep on looking
Is it attractive enough though? When looking for stocks to buy, I do not have a crystal ball. So I need to make choices about how I expect a business will perform, based on what we know today.
In the first quarter, Alphabet’s revenues grew 12% year-on-year. Its ‘search and other’ division reported strong revenue growth. Headcount was almost 5,000 below the same point a year before. Meanwhile, the benefit of AI fed through to higher Google Cloud revenues. They jumped 28% year-on-year.
The company immodestly claimed that its latest AI model is “an extraordinary foundation for our future innovation”. That is at variance with my own recent experience of the Google search experience, which concerns me somewhat.
Alphabet seems to be doing well and AI could help propel it forward. But I am still nervous about the risk to its core search business. It is among the stocks I would be happy to buy at the right price, but I am waiting for an even more attractive valuation, given the risks.
