So far this month, the “AI sell-off” that took shape during July has continued to knock Big Tech stocks lower. Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) is no exception. Even after last month’s post-earnings plunge, Alphabet stock has continued to dip down to even lower price levels, due to a further souring of sentiment of generative AI stocks.
When it comes to how much longer this sentiment shift will last, the jury’s still out. Yet while that may leave you needing to reconsider other Big Tech and/or “Magnificent Seven” stocks, the situation may be different here for the Google and YouTube parent.
For one, the risk of further price declines may be less severe with GOOG than with other “Mag 7” names. As you likely know, many of them have, and continue to, trade at what could be best described as “priced for perfection” valuations.
Second, even if poor performance carries on in the near-term, this is no way indicates a bleak long-term picture for Alphabet shares. In fact, a path to steady gains via continued organic growth is still in play.
Alphabet Stock: Not Too Far From the Floor
There is a major silver lining with GOOG, as it faces the prospect of a continued near-term pullback. Following the initial rounds of this latest sell-off, Alphabet has fallen down to a forward valuation of 22.5 times earnings. At this forward price-to-earnings ratio, GOOG is slightly cheaper than Meta Platforms (NASDAQ:META).
Compared to other “Mag 7” components, the valuation Gap between them and Alphabet stock is massive. Yes, there’s a good reason other names in this tech sector septet trade at forward multiples in the 30s, 40s, and, in the case of Tesla (NASDAQ:TSLA), over 90. These stocks are perceived to have far greater growth potential stemming from the GenAI trend than Alphabet.
There are also concerns that GenAI will disrupt Alphabet’s cash cow Google Search unit. This also explains the valuation discount. However, in the current market, there is an advantage to having this lower valuation.
If GOOG falls by another 20%, it’ll arguably be in bargain territory. For other top AI plays a 20%, 30%, or even greater drop could happen, and yet a more valuation-conscious market may still deem them “too pricey,” leaving them vulnerable if bearish sentiment persists.
An Even Greater Silver Lining
If you think the aforementioned silver lining sounds nice, consider the fact that there may be an even greater silver lining regarding the latest Alphabet stock sell-off. At lower prices, the market is really underestimating Alphabet’s potential to capitalize on AI.
ChatGPT developer OpenAI may roll out its own search engine, SearchGPT, but it’s presumptuous to assume that this competitor will start eating its lunch. After all, Google has already integrated GenAI features into its widely-used platform.
Merely having such features may not be enough to convince internet users to switch from what’s more-or-less the default search engine platform.
Keep in mind, too, that other attempts to “disrupt” Google using AI have led to little change in search engine market share.
Besides the prospect of Google having a deeper competitive moat than currently believed, it’s also important to note that, despite the perceptions, Google is starting to profit to the AI trend, in ways similar to that of its pricier peers.
As pointed out previously, the AI growth trend is driving elevated sales and operating income growth for Alphabet’s Google Cloud unit. This could mean big upside, when (not if) tech stocks recover.
The Verdict: Hold Onto GOOG if You Own it, Buy it if the Sell-Off Continues
The AI sell-off could last weeks or even a few months, but at some point, things will normalize. “AI mania” got out of hand earlier this year, but once the dust settles, investors will dive back in, as major tech companies start or continue to show how this technology is having a positive impact on the bottom line.
With GOOG, this may cause a tremendous shift back to bullish. Not only could GenAI continue to boost the performance of Google Cloud. It may also soon bolster the performance of Google Search and YouTube. Both factors could result in steady earnings growth over the next few years.
Per sell-side forecasts, GOOG’s annual earnings could top $10 per share by 2026. Hitting these forecasts will likely result in shares rising in line with earnings growth. The potential for multiple expansion may not be out of the question, either.
Hence, our view on Alphabet stock remains unchanged. If you currently own it, you may want to hold on. If you’ve yet to buy, you may want to take advantage of the sell-off.
Alphabet stock earns a B rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
On the date of publication, the responsible editor did not have (either directly or indirectly) and positions in the securities mentioned in this article.
