Shares in S&P 500 giant Alphabet (NASDAQ: GOOG) – the owner of Google and YouTube – have taken a huge hit recently. Since 10 July, they’ve fallen from $193 to $159 – a decline of about 18%.
Given this significant fall, I bought a few more shares in the mega-cap tech company for my retirement portfolio last week. At current levels, I think they’re a bargain.
Low valuation
Let’s get straight into the valuation here because right now Alphabet stock looks very cheap.
Currently, Wall Street analysts expect the tech giant to generate earnings per share of $7.66 this year and $8.71 next.
So, at today’s share price of $159, the company’s forward-looking price-to-earnings (P/E) ratio is 20.8, falling to 18.3 using next year’s earnings forecast.
Great value
These multiples – which are below the S&P 500 average – strike me as very low for a company of Google’s quality.
This is a business with an incredible long-term track record (just look at its long-term share price chart). It’s also a company with plenty of growth potential in today’s digital world given its exposure to digital advertising (I’m excited about YouTube’s potential), cloud computing, digital healthcare, and self-driving cars (it already has self-driving taxis on the road in the US).
Additionally, it has a rock solid balance sheet. At the end of June, the company had around $100bn in cash and short-term investments on its books and minimal long-term debt. Given its massive cash pile, the company has started paying dividends to investors (the yield is still low at around 0.4%). It’s also doing share buybacks.
Multiple risks
Now of course Alphabet isn’t perfect, and there are quite a few risks to the investment case here.
For starters, Google’s search business could be disrupted by ChatGPT and other generative AI applications. The company’s advertising revenues seem to be holding up well so far, however, this is a genuine risk looking ahead. Google does have its own generative AI model – Gemini. But this isn’t as popular as ChatGPT so there’s definitely some uncertainty here.
Next, regulators are targeting the company due to its dominance. Recently, the US Department of Justice has been taking aim at Google for operating a monopoly in digital advertising. This could lead to a break up of the tech giant (this might actually create more value for investors). It’s worth noting that European regulators are looking at the company too.
Finally, there’s the fact that advertising is a cyclical business. If the global economy continues to slow down, Alphabet’s advertising revenues could take a hit.
I’m a buyer
Looking at the share price and valuation, however, I reckon a lot of this risk is priced into the stock already. So, I’m a buyer at current levels.
Taking a long-term view, I reckon this ‘Magnificent 7’ stock will continue to do well for me.
The post Down 18%, this mega-cap S&P 500 stock could be the bargain of the year appeared first on The Motley Fool UK.
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Ed Sheldon has positions in Alphabet. The Motley Fool UK has recommended Alphabet. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
