Is Alphabet an Undervalued Growth Stock to Buy?

Alphabet (NASDAQ:GOOGL) is easily one of the most successful companies in history. As the parent company of Google, Alphabet has stood at the top of the search engine market since the early days of the internet. Today, the company has diversified into everything from making smart devices to providing cloud computing services. Surprisingly, though, Alphabet’s stock is priced at lower multiples than many other massive tech stocks.

Is Alphabet an undervalued growth stock to buy today, and what kind of future can shareholders expect from Alphabet going forward?

First, a Closer Look at Alphabet’s Valuation Metrics

To decide whether Alphabet could be undervalued, we first need to see where the stock is trading relative to its performance. At 23.5x forward earnings, Alphabet trades moderately below the S&P 500 average of 24.1.

Comparing Alphabet to other stocks in the Magnificent Seven, the value proposition begins to look even better. Microsoft currently trades at 33.8 times expected forward earnings, while Amazon’s multiple is 43.0. By the standards of its mega-cap tech peers, Alphabet appears to trade at quite a low earnings multiple.

That isn’t to say, however, that the stock is necessarily cheap. At 6.8x sales and 27.3x cash flow, GOOGL shares are priced at fairly high multiples to key performance metrics. This leaves the question of whether the company’s ongoing growth can justify a bit of a premium pricing.

The stock’s price-to-earnings growth ratio of 1.3 suggests that Alphabet at this point could be trading near a fair value compared to near-term growth.

How Is Alphabet Performing Now?

Like most large tech companies, Alphabet has had an extremely good couple of years. In Q3, for instance, revenue rose 15 percent year-over-year to $88.3 billion. Net income, meanwhile, increased from $19.7 billion in the year-ago quarter to $26.3 billion in Q3. Both revenue and net income handily beat Wall Street expectations, reflecting the strength of Alphabet’s overall performance.

Leading the pack as a growth driver at Alphabet was cloud revenue, which spiked by 35% to $11.4 billion. This massive increase in cloud sales is partially a result of the company’s AI Investments and the surging demand for cloud AI services. Alphabet has also established a bit of a natural lead in the AI space with its AI-powered Google search results and its Gemini assistant.

With that said, the company’s legacy businesses are by no means flagging. Search advertising generated $49.4 billion last quarter, a gain of more than 12% from a year earlier. Even YouTube, increasingly pressured by rival video platforms, was able to produce $8.9 billion in revenue.

To put these results in context of the company’s long-term performance, let’s consider how Alphabet has fared over the last five years. For the full year of 2019, the company generated $161.8 billion in revenue and $34.3 billion in net income. For the 12 months ending in Q3, those numbers were $339.9 billion and $94.3 billion, respectively.

Management has done an excellent job over many years of staying at the forefront of technological trends, all while continuing to build value in the company’s existing core business lines.

What Does the Future Look Like for Alphabet?

Looking down the road, analysts expect Alphabet to keep delivering fairly strong earnings growth for several years to come. Over the next 3-5 years, the company’s earnings per share are expected to rise by about 16.5% on a compounded annual basis. Ongoing growth from AI and cloud services will likely contribute significantly, as demand for cloud computing doesn’t seem to be going anywhere but up for the time being.

Investors will also likely see a growing stream of cash dividends from Alphabet over that time period. The company began paying a dividend earlier this year and the stock currently yields 0.4%. Assuming management raises the dividend annually, though, investors could see significant dividend growth from GOOGL going forward. This trend could also be true for other large, maturing tech companies. Meta, for instance, also began paying a dividend for the first time in 2024.

Analyst price forecasts for Alphabet are similarly positive, with the median target price for the next 12 months currently sitting at about $210. Given the stock’s most recent closing price just north of $190, this would leave about 9.7% worth of upside in GOOGL. The stock also has an overwhelming buy rating, with more than 80% of analysts rating it as a buy and no standing sell recommendations.

It’s worth noting that this only puts Alphabet’s returns over the next year in line with the broader S&P 500. Wall Street expects the S&P to return about 10% in 2025. That said, Alphabet’s long-term growth potential could allow it to meet or exceed market performance for several years to come.

There’s also a case to be made that total stock market returns could fall off sharply in the second half of this decade due to the market’s current overvaluation. If this were to happen, Alphabet could still be a decent stock to own, as it is sufficiently dominant in its own industry that it would likely be able to weather the storm.

So, Is Alphabet an Undervalued Growth Stock to Buy?

All things considered, it’s hard to call Alphabet substantially undervalued right now though some its cloud division is growing fast. Like other mega-cap tech stocks, GOOGL trades at a premium price that reflects both its future growth potential and its unassailable position in its industry. While other massive tech companies run a strong risk of being overvalued, though, Alphabet seems to trade at a more or less fair value.

When we put it all together, Alphabet looks more like a fair value than an undervalued stock. This doesn’t mean, though, that it couldn’t be a very solid stock to buy. Buying a great business like Alphabet when it’s valued fairly can produce very strong returns over many years, and the stock seems to be one of the more fairly priced in today’s tech market. With minimal risk of overpaying, Alphabet could still be a very respectable growth choice for an investment portfolio.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.