If you've been paying attention to the markets in the past few years, then you know just how much some of the most dominant technology companies' shares have climbed. Investors looking to put money to work might be discouraged by all the bullish fever.
However, there's a cheap stock that you've undoubtedly heard of that deserves some attention. Is it a no-brainer buying opportunity in 2025?
Why the discount?
In the past five years, Alphabet (GOOGL -1.35%) (GOOG -1.30%) stock has climbed 169% higher. That's a better gain than the tech-heavy Nasdaq-100 index. But even after such a fantastic return, as well as a market cap of $2.4 trillion, the internet giant looks like a worthy investment candidate.
Shares trade at a forward price-to-earnings (P/E) ratio of 21.6, which is much cheaper than they were three years ago. The Nasdaq-100 index, on the other hand, carries a forward P/E ratio of 25.1.
It makes zero sense why one of the world's most successful enterprises sells at a discounted valuation. This setup would be understandable if Alphabet's growth were going to fall off a cliff. But this doesn't appear to be the case.
According to Wall Street consensus analyst estimates, the company's revenue and earnings per share are projected to rise at compound annual rates of 11.2% and 13.2%, respectively, between 2024 and 2026. And given that both those figures increased at a brisk pace historically, it's not unreasonable to assume those double-digit growth prospects can continue throughout the back half of this decade.
Network effects
Alphabet isn't a dominant business for no reason. It possesses sustainable competitive advantages that protect it from the constant threat of disruption in an ever-changing tech landscape.
The company has perhaps one of the widest economic moats around. A key component of this is the presence of network effects. This is prevalent in Google Search, the crown jewel segment.
The amount of information out there seems to be rising at an exponential pace. Google Search's ability to organize this and make it accessible to consumers across the globe provides immense value. And over time, the company's ability to improve its algorithms makes the experience better for internet surfers. It all creates a positive feedback loop.
Network effects also underpin YouTube's moat. As more content creators post more videos, it draws in a wider audience that spends more time viewing. This in turn incentivizes content creators to do even more. Both Google Search and YouTube essentially become more valuable as more people use them, which makes it very difficult for anyone displace them.
Financial fortress
It's worth highlighting just how profitable Alphabet is. In the third quarter of 2024, it reported a 32% operating margin. This led to strong free-cash-flow generation of $17.6 billion, the consistency of which results in a pristine balance sheet that has more cash and cash equivalents than long-term debt.
Being in such a favorable financial position can help shareholders sleep well at night. There is virtually no risk that this business defaults on its debt obligations, as interest payments totaled just $54 million in Q3, translating to less than 0.1% of overall sales during that period. And it has the capital to fund dividends and buybacks.
Alphabet also has the ability to invest aggressively in artificial intelligence initiatives, with capital expenditures coming in at an expected $13 billion in the just-ended fourth quarter. There are very few businesses that can afford this, which is all in the name of improving products and services for its users and ad customers, further supporting the moat.
The market is presenting investors with the opportunity to buy Alphabet shares at a cheap valuation at the start of 2025. I suggest taking a closer look at this situation for your portfolio's benefit.
