Is Alphabet Stock a Bargain or Justifiably Cheap? Insights from Bernstein Analyst

Alphabet Inc. shares have recently attracted attention as they trade at unprecedented discounts relative to both the S&P 500 and Meta Platforms Inc. This situation raises questions about the value proposition of investing in Alphabet. According to Bernstein analyst Mark Shmulik, while Alphabet’s stock may seem like a tempting buy based on certain financial metrics, there are significant regulatory and competitive risks that investors must consider.

Current Valuation Metrics

Alphabet shares (GOOG) and (GOOGL) are currently trading at nearly their largest-ever discount to the S&P 500 when looking at forward price-to-earnings (P/E) multiples. This record discount was established just weeks ago, indicating a pronounced divergence in market sentiment. Additionally, Alphabet’s shares are now trading at their largest discount ever relative to Meta (META). Shmulik noted that, without context about the company, one might be inclined to buy Alphabet’s stock, given that it is trading at 19 times forward earnings estimates. These estimates suggest that revenue could grow at an impressive annual rate of 11% through 2027, while earnings per share might compound at a robust 15% rate during the same period.

A Generational Buying Opportunity?

With such promising forecasts, the narrative could easily support the notion that this is a generational buying opportunity. Shmulik points out a familiar investment adage: “Be strong when others are weak, brave when others are fearful, or really just plug your nose and buy, right?” However, the reality is more nuanced, and investors need to consider several factors before committing capital to Alphabet shares.

Regulatory Risks Ahead

One of the most pressing challenges Alphabet faces is regulatory scrutiny. The company is currently embroiled in legal battles related to antitrust issues concerning its search engine and app store. Shmulik suggests that it is highly unlikely Google will completely emerge unscathed from these proceedings. A significant concern is the potential impact of these antitrust actions on Alphabet’s search distribution channels, which he estimates could be jeopardized by up to 20% to 25% if the outcomes lead to significant changes in the way search placements operate.

As noted in other discussions about Google’s regulatory complications, the possibility exists that it could lose its position as the default search engine across multiple platforms, should competitors like Bing or Apple capitalize on the openings created by these legal issues.

Competitive Landscape: AI Threats

In addition to regulatory hurdles, competitive risks also loom large. Alphabet must contend with the rapid advancements in generative artificial intelligence, particularly the first-mover advantage exhibited by OpenAI. Shmulik highlights that competitors like Apple are entering this sphere more slowly, yet there are concerns that new capabilities in Apple’s software could result in users relying less on conventional web searches.

With AI staying at the forefront of tech discussions, the market appears divided on Alphabet’s future in this domain. Some view Google as an “AI loser” due to potential risks regarding search share and monetization. Conversely, others consider Google an “AI winner” thanks to initiatives like Gemini and their cloud offerings. Such dichotomy only serves to impede clear investment strategies.

Comparative Analysis with Meta

Despite Alphabet’s valuation gap and promising growth rates, Shmulik maintains a favorable outlook for Meta over Alphabet. He rates Alphabet shares as “market-perform” with a target price of $180, while simultaneously rating Meta shares as “outperform” with a higher target of $600. Shmulik expresses that “it’s difficult to defend a high-conviction long Google pitch to investment committees, especially with Meta ‘easier’ and firing on all cylinders.” This comparison underscores the complexities investors face in choosing between these two tech giants.

Concluding Thoughts

Ultimately, the question remains: are Alphabet’s shares a bargain or justifiably cheap? Key financial indicators suggest that Alphabet has potential for growth, yet regulatory and competitive landscapes present formidable challenges. Investors must weigh these factors carefully, alongside analyst insights, before deciding whether to commit to Alphabet’s shares in what could either be a compelling investment opportunity or a risk-laden endeavor.

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Is Alphabet Stock a Hidden Gem or Risky Investment? Insights from Bernstein Analyst