Alphabet stock is near 52-week highs. But it still looks cheap

Alphabet (NASDAQ: GOOG) stock is having a great run at the moment. Up around 56% year to date, it’s currently near 52-week highs.

I think the mega-cap tech stock is still relatively cheap however. Here’s why.

Low valuation

This year, Alphabet is expected to generate earnings per share (EPS) of $5.63. However, next year, analysts expect EPS of $6.65.

Taking this 2024 earnings estimate, Alphabet has a forward-looking price-to-earnings (P/E) ratio of about 21 right now.

That’s a relatively low valuation for a company of Alphabet’s quality, in my view.

Growth potential

This is a company that operates (and is a leader) in many growth industries including:

• Digital advertising – It’s the biggest player here and this industry is expected to grow by around 8% a year between now and 2027

• Streaming – Alphabet is the owner of one of the biggest streaming platforms on the planet, YouTube. In Q2, YouTube’s revenues were $7.7bn vs $8.2bn for Netflix

• Cloud computing – It’s the third-largest player in cloud. In Q2, revenues here grew 28% year on year

• Artificial intelligence (AI) – It’s one of the world’s most dominant players here and is having success with Bard – its rival to ChatGPT

• Self-driving cars – Alphabet owns Waymo, which is already operating driverless taxis in some US cities

Given its dominance in these industries, I’m expecting the company to generate solid growth in the years ahead (analysts currently expect top-line growth of 8% this year and 11% in 2024).

Considering this potential growth, a P/E ratio of 21 is an attractive valuation.

It’s also worth noting the price-to-earnings-to-growth (PEG) ratio is around 1.2. That’s quite low, indicating there’s value on offer.

Rock-solid balance sheet

But it’s not just about growth here. Another attraction of Alphabet is its rock-solid balance sheet. At the end of Q2, the company had long-term debt of just $15bn on its books. That’s peanuts (total stockholders’ equity was $256bn).

It also had around $114bn in cash and cash equivalents, which it will now be earning decent interest on.

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The implications here are that Alphabet is unlikely to be negatively impacted by higher-for-longer interest rates. This combination of growth and a strong balance sheet make the P/E ratio of 21 look like a steal, to my mind.

Cheap compared to its peers

One more thing that’s worth pointing out is Alphabet’s valuation is low relative to its peers. Some of the Big Tech stocks have much higher valuations.

The only Big Tech that’s cheaper is Meta.

I see it as a ‘buy’

Now, while I think the stock looks cheap, there are a few risks to be aware of here, including a downturn in digital advertising spending (if economic conditions deteriorate), intervention from regulators, and competition from other tech companies.

All of these issues could impact future growth (and result in the stock looking not as cheap).

However, overall, I think the stock looks attractive at present. If it wasn’t already my largest stock holding, I’d be buying it today.

The post Alphabet stock is near 52-week highs. But it still looks cheap appeared first on The Motley Fool UK.

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Ed Sheldon has positions in Alphabet, Amazon.com, Apple, Microsoft, and Nvidia. The Motley Fool UK has recommended Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, and Nvidia. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, 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.

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