The stock market's current sell-off is disproportionately affecting artificial intelligence (AI) stocks due to their dominance over the past few years. Some stocks have gotten a bit overheated, causing them to be the first to sell off as investors take gains. However, a few in this cohort were already cheap beforehand and have now reached bargain-bin status.
One of these is Alphabet (GOOG 2.56%) (GOOGL 2.79%), as it reached valuation levels rarely seen over the past few years. History is pretty clear about what happens over the next few months when Alphabet reaches this valuation, and it gives a strong signal for what investors should do with the stock.
NASDAQ: GOOGL
Key Data Points
Alphabet's stock doesn't reach this valuation level often
Alphabet is the parent company of Google, YouTube, Android, and other subsidiaries under the Alphabet umbrella. Although its business is quite broad, about 75% of Alphabet's revenue comes from advertising-related sources. This is a key point, as advertising budgets are some of the first areas to be cut in preparation for or during a recession.
This fear caused Alphabet's stock to sell off heavily and reach levels not seen for more than two years.
GOOGL PE Ratio data by YCharts
From a trailing price-to-earnings (P/E) ratio standpoint, Alphabet hasn't been this cheap since the beginning of 2023, when the market was convinced the U.S. was headed for a recession. However, this never truly surfaced, and Alphabet ripped off an incredible year of growth in 2023, with the stock rising nearly 60% in 2023.
Zooming out a bit more, Alphabet's stock has rarely been this cheap.
GOOGL PE Ratio data by YCharts
It traded below 20 times earnings briefly during the COVID-related sell-off and two other times: the Great Recession and in 2012. Alphabet's stock has always recovered following these hefty sell-offs and has given shareholders fantastic returns.
But could this time be different?
There are other concerns besides a recession
Another item hanging over Alphabet's head is the U.S. government's attempt to break up Alphabet for being an illegal monopoly. This started in the Biden administration but is continuing in the Trump administration. There are currently two ongoing cases: one looking to break up Alphabet's search dominance and another targeting its advertising technology. The current remedy is focused on forcing Alphabet to sell its Google Chrome browser. Still, Alphabet is fighting this sale as much as possible because it believes it could severely harm the U.S. economy and even have national security implications.
Now, that's coming from Alphabet, which is trying to protect its current business status. However, those arguments probably have some truth to them, although they may be slightly inflated.
I have no idea what the U.S. government will decide to do with Alphabet, but spin-offs historically create value for all parties involved, which is why they are still common.
As a result, I'm not incredibly worried about what the justice system decides, as I have no control over it and cannot predict what will occur or when. Right now, I'm focused on buying Alphabet stock because it has reached a valuation level seldom seen in its life as a public company. While the next few months could be a bit rocky depending on how advertising spending holds up amid an uncertain economic client, Alphabet always roars back stronger than before, which gives me confidence that if you're buying shares today with a three- to five-year mindset, you'll have a profitable purchase that will beat the market.
