On a P/E ratio of 17, Alphabet’s now a value tech stock

Shares in Google and YouTube owner Alphabet (NASDAQ: GOOG) look cheap right now. At the current share price of $173, the stock’s forward-looking price-to-earnings (P/E) ratio’s only 18, falling to 17 using next year’s earnings forecast.

At that earnings multiple, I think the stock’s worth considering. What we have here is a value tech stock.

Investors are nervous

It seems a lot of investors currently have doubts over Alphabet’s long-term growth potential. The stock’s trading at a discount to the market (the median P/E ratio across the S&P 500 index is about 19), which is unusual for a growth company.

I can understand why investors have doubts. Right now, generative artificial intelligence (AI) platforms like ChatGPT and Perplexity are disrupting the search engine business (where Alphabet generates the bulk of its revenues) at a rapid rate.

For over two decades, Google basically had this market to itself. Now however, competitors are rapidly grabbing market share so there’s a fair bit of uncertainty.

Not sitting still

Alphabet’s not sitting still while this is happening however. Currently, it’s rolling out a ton of AI features across its platform, and some of these are really impressive.

There’s Gemini – which is similar to ChatGPT – a product I use all the time (I prefer it over ChatGPT because it links to my Google account). Then there’s AI Overviews (which now has 1.5bn monthly users), which instantly provides answers to Google queries.

Additionally, there’s now AI Mode in Google, which the company launched at the recent Google I/O day (starting in the US). This is like a Google search on steroids. On top of this, there are new AI shopping features.

Many growth drivers

The story here isn’t just about search though. Today, Alphabet has many other growth drivers including YouTube, cloud computing, autonomous taxis (Waymo), and cybersecurity.

I’m particularly excited about YouTube’s potential. This platform’s really powerful (it has over 5bn videos) and I think it would be hard for a competitor to disrupt the market.

I’m also excited about Waymo (I recently took a short ride in one). This side of the business doesn’t generate any profits right now but the potential’s huge.

Near-term growth

It’s worth noting that this year analysts expect Alphabet to generate revenue and earnings per share growth of 11% and 15% respectively. That’s a higher level of growth than a lot of other S&P 500 companies are expected to deliver.

Worth a look today

So all things considered, I believe there’s value on offer here right now. In my view, the company’s quality and growth potential’s not reflected in the share price.

There are risks around search, as I mentioned above. But I don’t think this stock deserves to be trading at a discount to the market.

Given the low valuation, I believe it’s worth considering today.

The post On a P/E ratio of 17, Alphabet’s now a value tech stock appeared first on The Motley Fool UK.

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Edward 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.