With the market just hitting new all-time highs and the average market valuation at the upper end of the historical range, some may think there aren't any bargains left to buy.
But that's usually never true, as there are always bargains to be found in some corner of the market.
And sometimes, a good deal comes along even in the form of a household name staring you right in the face. Today, Alphabet (GOOG 1.16%) (GOOGL 1.13%) looks like that very bargain.
1. It's cheap
Despite a nice rally last year, Alphabet remains the cheapest stock in the Magnificent Seven. Alphabet has a P/E ratio of 26.7, whereas no other Mag Seven stock has a valuation below 30. On a forward basis, Alphabet's forward P/E ratio is just 22.5.
GOOG PE Ratio data by YCharts
That forward P/E ratio is even below that of the S&P 500 index, which stands at 24.3!
The low valuation comes in spite of several other elements that make Alphabet even cheaper than it looks. This includes the $93 billion in cash on Alphabet's balance sheet, good for about 4% of its market cap. And Alphabet continues to lose money on its experimental "other bets" segment. While suppressing today's profits, as we'll see, some of those projects are likely to have significant positive value.
2. Alphabet's AI chops continue to be underrated
Part of the reason Alphabet's valuation is so low is that investors are concerned the bevy of artificial intelligence startups like OpenAI, Perplexity, and others will threaten the Google Search business.
However, Google Search has enormous distribution, so much so that the name Google is synonymous with Search. And Alphabet's AI subsidiaries DeepMind and Google Brain, brought together by Google in 2023, were the first to develop transformer technology, which is the breakthrough innovation that has enabled ChatGPT and other recent AI innovations.
The advent of ChatGPT initially caught Alphabet off-guard, but Google's AI researchers seem to have gotten their act together over the past year. In December, Alphabet released Gemini 2.0, its in-house large language model, to rave reviews. And by putting AI-powered summaries at the top of appropriate searches, Google should be able to head off would-be competitors and keep customers in the Google ecosystem when searching for information.
Last quarter, Google Search still managed to grow 12.2% despite its already massive size, showing no ill effects from the new AI competition. And since Alphabet produces its own in-house tensor processing units (TPUs) and has optimized its own AI infrastructure, Google's costs to produce AI are likely much lower than any startup, which likely has to run models on expensive Nvidia (NVDA -3.12%) GPUs rented from the major clouds.
Google Cloud is just getting started
While Google Search and YouTube currently get most of the attention and drive most of Alphabet's profits, investors may not be giving Google Cloud the credit it deserves. Although third in the cloud infrastructure oligopoly, Google Cloud is more than holding its own. Last quarter, Google Cloud revenue accelerated 35% -- the highest growth rate of any of the cloud IaaS providers – and operating profits surged 7.3 times over to $1.95 billion.
Google Cloud wasn't profitable as recently as two years ago, but the current $8 billion profit run-rate is beginning to contribute more meaningfully to overall profitability. Google Cloud contributed 7% to overall operating profits last quarter, and that figure is set to increase as enterprises increasingly migrate from on-premise to cloud-based IT services.
Cloud is set to be a second meaningful profit contributor, diversifying Alphabet away from its dependence purely on digital advertising dollars.
Waymo is beginning to look like real business
Finally, Alphabet also has its often-ignored "Other Bets" segment, a loss-generating consortium of futuristic ventures that could take years or decades to pay off.
Waymo began as an experimental self-driving program at Alphabet in 2009 within "Other Bets," but 2024 proved to be a pivotal year for the technology. Having already started service in Phoenix in 2020, Waymo expanded its San Francisco service area and began full service to the public in Los Angeles last year. Amazingly, Waymo grew to the same market share as Lyft (LYFT 1.47%) in San Francisco as of November, according to YipIt data.
Even more cities could see autonomous disruption soon, as Waymo also announced an expansion to Austin and Atlanta in 2025, with a Miami expansion set for 2026. Waymo also announced it would begin its first international testing in Tokyo, Japan next year.
While investors are ascribing hundreds of billions of dollars in value to Tesla's (TSLA -1.41%) robotaxi ambitions, they don't appear to be valuing Waymo as anything significant, given Alphabet's current value. But considering Waymo is the one with its own ride-hailing service already in operation in three major cities and taking market share from incumbents, the autonomous ride segment seems like another hidden gem in Alphabet's technology portfolio.
