The S&P 500 index is currently trading at around 22 times forward earnings. That’s way above the long-term average of 17 times, which indicates that many US stocks are trading at frothy valuations.
Not so Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL), though. The Google owner’s forward price-to-earnings ratio of 19.4 is the cheapest among the so-called ‘Magnificent 7’ stocks. The others are Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla.
While the Alphabet share price has more than doubled in five years, it remains roughly 12% lower than it was in February. And at $183, it’s basically flat over 12 months versus a healthy double-digit rise for the S&P 500.
Two massive dark clouds
Cleary then, the stock remains out of favour with investors. There are two main reasons for this.
First, Google has been labelled a monopolist in both search and advertising. It keeps running into trouble in Europe, where it’s facing the prospect of a multi-billion-euro fine under the EU’s Digital Markets Act.
There are cases ongoing in the US, which could also lead to steep fines. More worryingly, the US Department of Justice won a major case in April, and that may even result in Alphabet being forced to break itself up.
At the very least, I would expect Google to lose its position as the default search engine within Apple’s Safari browser.
Of course, Google is denying these allegations, and we don’t know how things will pan out. But it’s clearly not great for investor sentiment.
On top of this, there’s fear that Google search — still its most profitable business — is under threat from the rise of AI apps like ChatGPT and Grok. Put simply, if AI chatbots become the front door to the internet, Google might find itself no longer holding the keys.
My take
What to make of these threats? To be fair, I do use Google a lot less than I previously did before AI bots came along.
For example, at the weekend, I took a photo of the contents of my fridge and asked ChatGPT to come up with something tasty to cook. Before, I would have used Google search for that, to be directed to some site that specialised in recipes. There are many other day-to-day cases.
On the other hand, I still use Google for online shopping. Indeed, this higher-intent activity might be even more valuable to advertisers (it may lead to higher conversion metrics, for example).
As for Google losing its default status on Apple devices, I’m not as worried about that. Speaking personally, I would willingly choose to download Google over all others on my iPhone because it’s what I’m familiar with. I suspect most people would do the same.
On sale?
If this had all happened five years ago, I would be worried. But Alphabet is more diversified these days. YouTube is still growing strongly, as is Google Cloud, while its Waymo robotaxis have now driven more than 100m miles (a doubling in just six months).
Further out, I wouldn’t be surprised if Google ends up leading in both quantum computing and artificial general intelligence (assuming both become realities, which I think they will).
Weighing things up, I suspect that Alphabet stock is on sale today. Therefore, it’s well worth considering, in my opinion.
