Alphabet Trading at Bargain Prices?

After this year’s rally in technology stocks pushed the valuations of most megacap stocks to excessive levels, shares of Alphabet (GOOGL) are an exception.  Alphabet is the only one of the five biggest technology companies by market cap priced at a discount to the Nasdaq 100 Stock Index ($IUXX) (QQQ).  In times of economic uncertainty, investors are flocking to megacap technology stocks with strong cash flows and favorable growth prospects.

Shares of Alphabet are up +13% this month, nearly twice the gain of the Nasdaq 100.  This month’s rally is the largest monthly gain in Alphabet in almost two years and has added more than $140 billion of market value to the stock.  Aptus Capital Advisors said, “of the mega caps, Alphabet is the only one that has growth above 10%, that has a valuation that’s palpable, and which has the opportunity for multiple expansion.”

Alphabet trades at about 17 times expected profit over the next 12 months, below the stock’s ten-year average of 20 and below the 24 times expected profit for the Nasdaq 100. Alphabet’s valuation makes it a potential bargain among megacap technology stocks.  Apple (APPL), Microsoft (MSFT), and Nvidia (NVDA) all trade at premiums to their historical averages and to the Nasdaq 100’s valuation.

Last year, Alphabet sank -39% amid a pullback in spending on digital advertising and a broad selloff in technology stocks as interest rates soared after the Federal Reserve embarked on an aggressive rate-hiking campaign to combat inflation.  However, in recent months analysts have been raising their revenue estimates for Alphabet for 2023, and revenue growth is now expected to rebound to 18% from 10% in 2022.

Alphabet’s initial foray into artificial intelligence (AI) temporarily weighed on the stock last month on concerns about the competency of Bard, Alphabet’s rival to ChatGPT.  However, after granting access to the Bard chatbot, Bloomberg Intelligence said the release of Bard “could help allay fears the company is falling behind Microsoft-ChatAI’s ChatGPT in large language models.”  Also, Winslow Capital said, “the AI story has only just started, and since Alphabet trades at a discount, it is harder to say that Microsoft or Apple have the same upside potential.”

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.