Alphabet, the parent company of Google, has faced a considerable level of skepticism from investors throughout the past year, despite consistently delivering solid performance. The main concern revolves around how its flagship search business will perform in an era increasingly dominated by generative AI technologies. Investors have been wary, fearing that Google Search’s revenue could drop significantly, affecting the overall stock performance. However, the anticipated decline in revenue has not materialized, leading some analysts to believe that the stock remains undervalued.
Currently, Alphabet’s stock is trading at a notable discount compared to other members of the “Magnificent Seven” tech cohort, which includes giants like Microsoft and Apple. Although companies like Nvidia command higher valuations due to their rapid growth, analysts argue that newer entrants, such as Microsoft and Apple, do not justify their premium valuations based on growth alone.
In the first quarter, Alphabet reported strong growth rates, particularly in earnings per share (EPS), where it ranked second among its peers. Despite this, the stock trades at approximately a 50% discount to Meta Platforms, the next cheapest in the cohort. This discrepancy raises the question of what could happen should Alphabet’s valuation align more closely with its industry counterparts.
If the market assigns Alphabet a valuation equivalent to the industry average of 31.3 times forward earnings, the stock could potentially experience a substantial increase of 68%, even without factoring in future growth. This optimistic outlook rests on the belief that Alphabet can leverage its AI capabilities, allowing it to maintain its competitive edge in the search market while continuing to grow its revenues at a steady pace.
As the market gradually acknowledges Alphabet’s fundamental strengths and stable performance, it’s expected that investors might see significant returns. If Alphabet achieves an average valuation comparable to its peers, it could rise to be one of the top-performing tech investments available today. Therefore, now may be an opportune time to consider investing in Alphabet, capitalizing on the current valuation while anticipating a future correction that reflects its true potential in the tech landscape. This presents a hopeful prospect for both the company and its shareholders in the coming years.