At face value, Alphabet (GOOG -0.05%) (GOOGL -0.03%) stock looks undervalued at just 17 times trailing earnings, compared with the S&P 500 (^GSPC -0.38%) at 25 times trailing earnings. However, that doesn't paint the full picture. Alphabet had some one-time effects that dropped the valuation to that level, and it isn't an accurate assessment of how the company is valued.
Let's take a look at alternative ways to value Alphabet's stock and see whether it truly is undervalued.
Image source: The Motley Fool.
Using forward-looking projections can cut through one-time effects
Alphabet took a position in Space Exploration Technologies (SPCX +3.16%) over a decade ago, which grew to become a massive investment win after SpaceX went public at around a $2 trillion valuation. Under accounting rules, Alphabet had to report those gains as profits on its income statement, thereby artificially boosting its earnings per share (EPS). Since June 30 (when Alphabet's quarter ended), SpaceX's stock has dropped, which requires Alphabet to report a loss in its third quarter (unless SpaceX reaches a new high before then). This effect will eventually wash out as SpaceX's stock reaches a growth rate similar to Alphabet's earnings growth.
Still, there could be another boost when Anthropic eventually goes public, as Alphabet is a major investor in that firm.
NASDAQ: GOOGL
Key Data Points
It's safe to say that Alphabet's price-to-earnings ratio will be pretty useless over the next year or two, so investors need to find a different way to value the stock.
A valuation tool many investors often use is free cash flow, as it eliminates any of the one-time effects an investment gain may have. The problem with this metric is that free cash flow is calculated using capital expenditures, and Alphabet is spending around $200 billion on capital expenditures this year, so its free cash flow is nearly nonexistent. So, I think the best metric to value Alphabet's stock is one of the line items above on the income statement: operating profit or operating cash flow. Using both of these compared with historical figures gives investors an idea of how Alphabet is truly valued from a historical standpoint, without the noise of investment gains or hefty capital expenditures.
GOOG Operating PE Ratio data by YCharts
From this standpoint, aside from a dip from 2022 to 2026, Alphabet's valuation seems to be about average to above average. I think this definitely shows that Alphabet isn't undervalued like it was a few years ago, but also isn't horribly overpriced. I think that gives investors the thumbs-up to invest in the stock, but it isn't a general buying opportunity for the stock like it was in April 2025.
