Daniel Foelber, The Motley Fool
6 min read
In This Article:
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Alphabet’s valuation is sharply lower than that of its mega-cap, tech-focused peers.
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It has a diversified business but is still heavily dependent on Google Search.
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However, competition could actually benefit Alphabet in the long run.
The "Magnificent Seven" refers to seven of the largest tech-focused companies by market capitalization -- Nvidia, Microsoft, Apple, Amazon, Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), Meta Platforms, and Tesla.
These companies are known for outperforming the S&P 500 over the long term. In recent years, these stocks have been responsible for a significant part of broader market gains, especially in 2023. But a prolonged period of outperformance has stretched the valuations of top performers, like Microsoft, which just made a new all-time high.
The Magnificent Seven haven't been as dominant in 2025, with names like Apple and Alphabet underperforming the S&P 500. Alphabet is so beaten down that it has become less expensive than the S&P 500 by an important valuation metric.
Here's why Alphabet is in the bargain bin, and whether the stock is a buy now.
When folks first get into investing, one of the first valuation metrics they likely encounter is the price-to-earnings (P/E) ratio -- which is simply the price of a stock divided by earnings per share (EPS) over the last 12 months.
The P/E ratio has some major flaws. For starters, earnings can fluctuate wildly based on the economic cycle, the timing of orders from key customers, mergers and acquisitions, impairment charges, and a slew of other factors. So, putting too much weight on the P/E ratio can be a big mistake. Smoothing out the P/E ratio by comparing it to historical averages over a period of time or looking at operating income can be effective ways to get a better reading on a company's profitability.
Another useful metric is forward P/E. This is based on analyst consensus estimates for the next 12 months of earnings, rather than what has already transpired over the past 12 months. Looking at forward P/E in conjunction with trailing P/E is good for bridging the gap between what has happened and what is expected to happen. It's also good for finding a more accurate valuation metric for companies that had one-off charges which made their P/E higher or booked a one-off gain that made their P/E lower.
The S&P 500's forward P/E ratio is 21.8, which is higher than its historical average. However, it is still lower than the forward P/Es of every Magnificent Seven stock except Alphabet.
