Investors keep underrating this technology giant.
We have hit another late summer stock market correction. After going on a monster run in 2023 and early 2024, the Nasdaq 100 technology growth index recently went through a price drop correction. It is currently off 9% from all-time highs hit in early July.
One stock down more than twice the Nasdaq 100 index is Alphabet (GOOG 1.82%) (GOOGL 1.79%). The technology giant and parent of Google Search, YouTube, and Google Cloud is down over 20% in just a few months. Investors are worried (again) about market share losses and the battle for supremacy in artificial intelligence (AI) that could disrupt Google’s historical moneymakers.
These worries are overrated and present a dip buying opportunity for one of the best companies in the world. Here’s why Alphabet is a no-brainer buy today.
Winning or losing in AI?
The rise of AI chatbots and new search engine functionalities has threatened Google Search’s dominance. OpenAI has ChatGPT, as well as many copycats that are innovating and trying to disrupt Google’s cash cow, which still makes up the majority of the parent company’s profits. Microsoft is one of OpenAI’s largest partners and has embedded the technology into the Bing search engine, which is the default engine on the Edge browser (the browser that replaced Internet Explorer).
On desktop computers — where Microsoft has the most market share — Bing has begun to gain market share on Google Search. Google Search’s estimated market share fell to under 80% for the first time in 15 years in recent months. Bing is the competing product stealing market share. While this is concerning, investors need some context on why Google “only” has 80% market share on desktops today.
Microsoft is spending tens of billions of dollars on internal AI products and OpenAI investments. The Edge browser defaults to Bing and is the default browser on Windows devices. Desktop is also increasingly less important as mobile searches take more of the profits for search engines. In mobile, Google has close to 100% market share if you exclude the Russian Yandex search engine (a market where Google doesn’t compete).
With the competitive advantage that Microsoft has on desktops and the aggressive push it has made to try to win some market share for Bing, I think investors should be impressed that Google still has such a high market share. It isn’t like Alphabet is resting on its laurels, either. In the new AI fields, Alphabet has shown an ability to copy or better any of the innovations coming out of OpenAI.
There are a lot of new competitors trying to beat Google. So far, it looks like Google has defended its position quite well. This makes me question whether Google is actually losing in AI. With revenue up 14% year over year last quarter, it’s more plausible that Alphabet is winning.
Superb financial performance
Alphabet’s financial results have been nothing sort of astounding. Its revenue hit $328 billion over the last 12 months, with growth coming from all facets of the business. Let’s not forget the promising Google Cloud segment, which is selling Alphabet’s AI innovations to third parties. Google Cloud revenue hit $10 billion last quarter and is finally turning a profit.
Overall, Alphabet’s operating income is at $98 billion and should eclipse $100 billion in 2024. This was driven by growth at Google Cloud, YouTube advertising, and the still-ever-important Google Search segment. That segment alone generated $48.5 billion in revenue last quarter. That’s almost $50 billion in revenue in just three months — incredible.
GOOGL Operating Income (TTM) data by YCharts.
The stock is undervalued
After this recent drawdown, Alphabet stock now trades at a price-to-earnings ratio (P/E) of 21.3. The broader S&P 500 index trades at an average P/E of 28.6. The Nasdaq 100 index trades at an even higher average earnings multiple of 41.
This is much too cheap for a company growing revenue in the double digits. On top of this growth, Alphabet management is increasingly returning cash to shareholders. It now has a small dividend yielding 0.27%, with plenty of room to increase in the coming years. Share buybacks have brought shares outstanding down by 11% in the last five years.
Add everything together, and Alphabet stock is a clear no-brainer buy at these prices.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Brett Schafer has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
