Alphabet (NASDAQ:GOOG, GOOGL) is currently on cloud nine. Shares of the tech giant are reporting significant growth in recent months, from trading below $90 back in February to around $105 at press time.
Largely, this affirms Alphabet’s strong product portfolio and business model. Broader market trends are also moving in the right direction, with the ferocity of interest rates slowing down. Undoubtedly, this is also contributing to more positive sentiment.
However, perhaps most importantly, momentum resumption is seen as a return to normalcy. Alphabet Inc’s market value dropped by $100 billion after its recently introduced chatbot shared misleading information in a promotional video released in February.
The market is recognizing its mistake of underestimating GOOG stock, which is why it has regained its position as one of the top-performing tech plays, making it an attractive choice.
| GOOG, GOOGL | Alphabet | $109.46, $108.87 |
GOOG Stock Is Regaining Its Mojo
Alphabet’s stock has experienced exponential growth since its initial public offering in 2004. However, GOOG stock came under pressure in 2022 as the broader markets struggled with inflation and high-interest rates.
As a result, the stock shed almost 20% over the past 12 months. Despite this, Alphabet has several key advantages that will enable it to overcome near-term challenges and regain its mojo. Alphabet is also actively looking for areas where it can improve and expand.
Alphabet’s margins have suffered as a result of over-expansion. The tech conglomerate hired too many staff during the pandemic in anticipation of growth that never came.
In response, Alphabet is taking steps to reduce its workforce. CEO Sundar Pichai announced in January that the company is reducing its workforce by 12,000. In addition, management recently revealed plans to cut back on employee benefits, which had been offered for free. These efforts are part of a larger trend in the technology sector toward cost-cutting. The hope is it will improve margins and less stock-based compensation for Alphabet’s investors.
AI Initiatives
Alphabet’s potential for long-term growth extends beyond cost-cutting measures. As the owner of Google and YouTube, two of the most visited websites globally, Alphabet has amassed valuable data collection.
Furthermore, Alphabet is a leading player in the artificial intelligence dominance race. While AI progress may heighten competition for Alphabet, it also presents a promising opportunity. This data is invaluable for any company looking to enhance its position in AI.
However, that does not mean I do not believe there are risks. As Dana Blankenhorn wrote in this stellar piece, AI is one area Alphabet needs to focus on if it wants to retain its leadership position.
While some industry watchers believe that generative AI could potentially eliminate the market for Alphabet’s search business, Google’s advancements in AI could also create more opportunities than challenges for the company. Although AI innovations could increase competition for Alphabet, the company is well-positioned to leverage its expertise. Therefore, Alphabet’s potential for growth in the AI field is an opportunity that investors should consider.
Attractive Valuation
With operations spanning various burgeoning industries such as digital advertising, cloud computing, and self-driving cars, Alphabet stands to benefit from its continued growth, making it an attractive investment prospect with the potential for increased earnings.
Secondly, Alphabet has strong brand power. Google and YouTube are the world’s most recognized and trusted brands. This gives Alphabet an edge in market share and customer loyalty, which can lead to sustained revenue growth. While there may be uncertainties surrounding Google’s position as the dominant force in internet search, it is undeniable that the company still reigns supreme.
Thirdly, Alphabet has shown high profitability in recent years. The company’s return on capital in the previous year was 25.3%, indicating efficient use of its resources to generate profits. This profitability will continue as Alphabet expands into new markets and invests in cutting-edge technologies.
Lastly, Alphabet has a solid balance sheet with minimal debt. This gives the company financial flexibility to pursue growth opportunities and weather economic downturns.
However, despite these positives, GOOG stock is undervalued compared to its historical highs and peers in Big Tech. Over the past 10 years, GOOG’s price-to-earnings ratio range has been between 8.37x (the lowest) and 66.05x (the highest), with a median of 27.09x. As of now, its P/E ratio stands at 23.12x.
When compared to its peers, Alphabet’s P/E ratio is notably lower. Meta Platforms has a P/E ratio of 24.94x, Netflix is at 33.27x, and Microsoft is at 31.50x.
Is GOOG Stock a Buy or Sell?
In conclusion, GOOG stock is undervalued compared to its historical and peer evaluations. Despite this undervaluation, Alphabet operates in several growth industries, including digital advertising, cloud computing, and self-driving cars, poised for continued expansion. These industries present a tremendous opportunity for Alphabet to increase its earnings potential.
Furthermore, Alphabet has established itself as a leader in the technology industry, with strong brand recognition, high profitability, and a solid balance sheet. This gives the company the financial flexibility and resources necessary to pursue growth opportunities and weather economic downturns.
Therefore, investors who recognize the potential of Alphabet’s strong fundamentals, expanding markets, and undervaluation may consider the stock an attractive buying opportunity. With a promising future outlook and a proven track record of success, Alphabet will continue to dominate.
On the publication date, Faizan Farooque did not hold (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
