Along with other leading megacap technology stocks, Alphabet (GOOG 0.32%) (GOOGL 0.37%) has enjoyed stellar gains so far in 2023. The search and digital advertising giant's share price is up approximately 57% year to date. The valuation momentum pushed the company's market capitalization to roughly $1.75 trillion.
Even though Alphabet has been a big winner recently, there are signs that the stock still has the makings of a smart long-term investment. Check out the following chart documenting the company's free cash flow (FCF) yield and read on for a closer look at why this trillion-dollar tech leader could be a great portfolio addition.
Alphabet's resilient business and FCF yield stand out
The FCF yield data in the chart above is from New Constructs, a company that provides investment research and stock analysis software. To calculate FCF, New Constructs starts with a company's operating profit after taxes and then deducts the change in the business's net working capital (minus excess cash) and the change in fixed assets. It's worth noting that this approach differs from the more common approach for calculating FCF, which involves taking operating cash flow and subtracting capital expenditures.
After calculating FCF, New Constructs takes the resulting FCF figure and divides it by the company's enterprise value to get its FCF yield.
Even though macroeconomic and industry-specific shifts have created headwinds for its core digital advertising business, Alphabet remains highly profitable and continues to serve up solid free cash flow.
According to New Constructs' data, Alphabet has the second-highest FCF yield out of any of the trillion-dollar tech companies over the trailing-12-month period. For comparison, Apple has the highest FCF yield at 3.4%, while Microsoft and Nvidia both have FCF yields of 1%, and Amazon has a yield of negative 1.7%.
Alphabet continues to serve up encouraging earnings and FCF even as operating conditions shift. The company flexibly adapts to challenges, and its profitable business model continues to look highly scalable.
Alphabet looks attractively valued next to its peers
Trading at roughly 24.6 times this year's expected earnings, Alphabet also has the lowest forward price-to-earnings ratio out of its trillion-dollar tech peers.
GOOGL PE Ratio (Forward) data by YCharts
For comparison, the table below outlines the forward P/E values of the other tech companies that currently have market caps above the trillion-dollar threshold.
| Company | Market Capitalization | Forward P/E Value |
|---|---|---|
| Apple | $2.8 trillion | 27 |
|
Microsoft |
$2.45 trillion | 30 |
| Amazon | $1.33 trillion | 42 |
| Nvidia | $1.12 trillion | 58.5 |
Data source: Yahoo! Finance.
With the lowest forward earnings multiple of its trillion-dollar peer group and strong competitive advantages stemming from its software and services ecosystem, Alphabet stock looks worthwhile even on the heels of big gains this year.
Alphabet could keep crushing the market over the long term
Alphabet's core digital advertising business continues to serve up strong profits and FCF, and it has plenty of room for expansion over the long term. The company also has big opportunities in the artificial intelligence (AI) space.
Through its Google search platform, Android mobile operating system, YouTube video service, Gmail, and other offerings, Alphabet has access to tremendous amounts of valuable data that can be used to inform and improve AI systems.
With its core ads business showing clear signs of longevity and strengthening foundations that could support new growth opportunities, Alphabet stock remains a smart play for long-term investors.
