There are only seven companies in the world with a market capitalization of at least $1 trillion. Only among these companies Microsoft, Apple, NvidiaAnd Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) have reached an even more exclusive club.
No, I’m not talking about gaining access to the “Magnificent Seven” – although each of these companies is also a member of that club. All four of these tech giants have a market capitalization of at least $2 trillion, and Alphabet is the latest member to reach this milestone.
After an encouraging first-quarter earnings report, Alphabet shares are up 9%. Is it too late for growth investors to pick up shares in Alphabet since its $2 trillion valuation was eclipsed?
I do not think so. In fact, now seems like a better time than ever to pick up some shares. Let’s explore why.
Don’t sleep on the advertising world
One of the biggest blows for Alphabet in recent years is that its core advertising activities have declined. Stiff competition from MetaplatformsTikTok and some smaller players, such as Pinterest And Snaphave found ways to draw cyclical advertising dollars away from Alphabet.
What I think investors are missing is that while Alphabet’s advertising business may not be growing at past levels, this segment remains hugely profitable for the company. In fact, Alphabet’s advertising and services businesses are responsible for almost all of the company’s operating revenue, with cloud computing contributing to nominal profitability.
The graph above shows the growth of Alphabet’s operating profit in relation to revenue. Although Alphabet’s revenue is starting to slow slightly, the company is still achieving impressive levels of operational efficiency. This has resulted in significant margin expansion and robust free cash flow for Alphabet. It’s these excess profits that are fueling Alphabet’s next move beyond advertising.
An end-to-end artificial intelligence platform
The hottest ticket in technology right now is artificial intelligence (AI). Over the past year, Alphabet has made a number of strategic investments in AI. The company’s generative AI model (called Gemini) is Alphabet’s answer to the very popular ChatGPT.
While ChatGPT may have a first-mover advantage, Alphabet has a secret weapon: data. Don’t forget that Alphabet owns Google and YouTube, the two most visited websites in the world.
Alphabet collects an unprecedented amount of data. Since large language models (LLMs) essentially rely on massive data libraries, Alphabet has a competitive advantage that will be difficult to match.
Where Alphabet really has the opportunity to get ahead of the competition is in integrating AI into the entire ecosystem. While Alphabet may be best known for Google and YouTube, keep in mind that the company also has a workplace productivity suite similar to Microsoft Office, and an emerging cloud computing company that sold in the first quarter alone grew by 28%.
The valuation story is convincing
The chart below compares the future price-to-earnings (P/E) ratio of megacap tech. Alphabet’s price-to-earnings ratio of 22.6 is the lowest in this cohort.
Alphabet shares rose significantly after its first-quarter earnings due to the company’s demonstrated growth across the business and the progress it is making in AI. But even after a big rebound, the company is still valued at a noticeable discount compared to most of its peers.
It’s entirely possible that many investors are still focusing solely on ad revenue and missing the bigger picture: margin expansion, rising cash flow and how Alphabet is reinvesting these profits. I think Alphabet stock is dirt cheap right now, and I see the disparity in the valuation multiples above as an attractive buying opportunity.
Now seems like a lucrative time to take advantage of the current trading activity in Alphabet and pick up some shares.
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Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla. The Motley Fool holds positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Pinterest, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Is it too late to buy shares in the newest member of the $2 Trillion Club? was originally published by The Motley Fool
