Google’s Cheap-Looking Stock Could Be An Opportunity – Or A Trap

Targeted by an antitrust case and nudged aside by generative AI, Alphabet has been trailing its Magnificent Seven peers. So, naturally, it was time to crunch some numbers.

Introduction

It’s hard to know what to think about Google and its parent company Alphabet. (And it seems wrong just to “Google” it.) This titan of search, cloud, and mobile keeps growing its prominence in our online lives and coming up with groundbreaking innovations – its super-powerful quantum computer is just the latest. But it’s also facing two very real threats: one from generative AI and the other from an antitrust case that could force this giant’s breakup.

And that’s taken a toll on its stock valuation. So with its shares now among the “cheapest” in the Magnificent Seven, I decided to crunch some numbers and find out whether this might be a magnificent time to buy. Here’s how I did it, along with the models you can use to make your own assessment.

Thesis

• Alphabet has three divisions: Services, Cloud, and Other Bets. The big profit driver is the Services category, which includes search, advertising, YouTube, Android, and devices (including Pixel). But its cloud wing is growing revenue and profits the fastest – fueled by the AI boom.

• Google holds a nearly 90% global market share in search. That dominance makes the company a very attractive destination for advertising dollars. When you look up something using its engine – regardless of whether you click on a link or scroll by it – Google makes money.

• The company faces two major challenges. One: new generative AI companies like Perplexity and ChatGPT parent OpenAI are targeting the search market. And two: antitrust regulators are pushing to break up the giant – which would severely hamper its business strategy.

• Alphabet has been investing heavily in AI to fend off the competition and improve productivity. In search, it recently launched “AI Overview” (AIO) – which uses a generative AI tool to summarize information from multiple sources automatically, instead of providing links to websites.

• The stock’s valuation looks cheap, based on a price-to-earnings ratio, discounted cash flow, and a “sum of the parts” analysis, but its uncertain earnings outlook and cash flow are probably going to keep it that way.

Risks

• Two big threats have been weighing on Alphabet’s valuation and fueling investor uncertainty: the risk that generative AI poses to its search dominance and what happens in the US antitrust case against the giant. US regulators say Alphabet should be forced to sell off Chrome, end payments to third parties like Apple for exclusive default search engine positioning, and start sharing its data.

• Google is fighting all three recommendations and has said it will appeal in court. The final outcome probably won’t be known until 2026, at the earliest.

• The harshest remedies would significantly hamper Alphabet’s business as Chrome, third-party payments, and the Android operating system (OS) are core to the company’s strategy and outlook.