Alphabet (GOOG -0.60%) (GOOGL -0.62%) is one of the most dominant companies in the world. It practically owns the search engine market with Google. Billions of people use Google to find what they need on the internet, and the advertising it serves to them along the way has made it one of the most lucrative brands in the world.
However, like any other company, Alphabet is subject to ups and downs. After it reported its fourth-quarter earnings, the stock dropped by around 7%. Clearly, the market didn’t like what it heard, but I saw this blip as a buying opportunity. The reasons why I bought the stock had nothing to do with its latest results — I’m more concerned about its long-term trajectory.
Alphabet has other businesses besides its dominant search engine
Alphabet may be Google’s parent company, but it also owns other massive brands such as YouTube, Android, and Waymo. These are strong businesses with huge potential.
According to Nielsen, YouTube is the most-watched streaming service in the U.S. That’s unlikely to change anytime soon, as YouTube has millions of content creators catering to specific audiences. Furthermore, these videos are relatively short compared to traditional TV shows, and short-form content is popular among younger audiences. YouTube ads had another strong quarter, lifting its revenue 14% year over year to $10.5 billion. For reference, streaming giant Netflix had revenue of $10.3 billion in Q4.
Another exciting segment of the business is Waymo, its autonomous vehicle division. Waymo now has self-driving taxis carrying customers in Phoenix, San Francisco, and Los Angeles, and plans to bring them to Austin, Atlanta, and Miami later this year. They will also debut in Tokyo, marking Waymo’s first international expansion. That’s a significant move, but any revenue this division books is being outweighed by the costs of getting these services up and running. Still, these are long-term investments that could position Alphabet to take a dominant share in a growing and important market.
In my opinion, Google Cloud is the company’s most exciting non-search business. Alphabet’s cloud computing division is helping power AI workloads across the globe. It grew its revenue by 30% year over year to $12 billion, making it one of Alphabet’s fastest-growing divisions. It also provides 12% of total revenue.
None of these divisions have anything to do with Alphabet’s legacy Google search business, which is a key factor in assessing if Alphabet has any succeeding long-term growth investments. There are still other divisions where Alphabet is growing and developing, making this a no-brainer purchase over the long term. However, Alphabet’s stock is incredibly cheap compared to its big tech peers, and that’s why any dip in the stock price should be seen as a buying opportunity.
The stock is cheap for its long-term growth trajectory
After Alphabet’s tumble following earnings, it now trades at 24 times trailing earnings and 21.4 times forward earnings.
GOOG PE Ratio data by YCharts.
If that sounds relatively cheap in today’s market, that’s because it is. The S&P 500 (^GSPC 0.03%) recently traded for 25.5 times trailing earnings and 22.3 times forward earnings. An even better comparison is the tech-heavy Nasdaq 100 index, which features a higher concentration of Alphabet’s big tech peers. That index traded for 33.4 times trailing earnings and 27.2 times forward earnings.
So Alphabet’s stock doesn’t carry a premium to either index, and investors value the company at a level below the market average. However, it’s clearly an above-average business. While short-term guidance and projections may cause the market to sell off the stock in the short term, the long-term trajectory for Alphabet is still positive, and it’s why I’m a buyer of the stock at today’s prices.
Alphabet is succeeding in too many long-term markets (AI, autonomous driving, social media, and cloud computing, to name a few) to ignore. Those successes will lead to long-term market-crushing returns for the stock.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Netflix. The Motley Fool has a disclosure policy.
