The stock market had a fairly bland month in March, with the broad S&P 500 index increasing about 2.3%. But, some companies, like Alphabet (GOOG -2.76%) (GOOGL -2.81%), had a much better March, with the stock rising 10%.
With that kind of rally in mind, many might wonder if they're too late on the stock and should look elsewhere. While it would be nice to hop in a time machine to correct your investing mistakes, it's not possible. Still, I think there are enough positive signs for Alphabet that you can still confidently buy, even if the stock rose 10% in March.
Alphabet had some catching up to do
Entering March, Alphabet lagged behind many of its big tech peers. The stock traded for a valuation less than that of the S&P 500, which was suspect considering the business's quality.
Much of the dismay around Alphabet's stock had to deal with its various generative artificial intelligence (AI) rollout blunders. Now that the investing public has moved on from those mistakes and realized that Alphabet's primary business is doing well, it's finally getting the respect it deserves.
Advertising accounts for 76% of Alphabet's revenue. This revenue comes from high-quality properties like the Google search engine and YouTube -- two dominant brands in their respective niches. Because of how much of a staple these two are, its revenue streams are highly consistent. Ad revenue was up 11% in the fourth quarter, and management also commented on its confidence to deliver healthy growth through 2024 during its conference call. This sets Alphabet's base case fairly high, as many of its other divisions are experiencing strong growth.
Its Google Cloud cloud computing division may be less than 10% of its total revenue stream, but it has a bright future. It grew 26% in Q4 and is vital in developing AI technologies, as many generative AI start-ups are Google Cloud customers.
The subscription business has also had a strong showing, as its revenue was up 23%, driven by YouTube subscriptions.
With advertising doing well and the growth divisions succeeding, it's no wonder Alphabet bounced back from its low valuation to start the month. But why is it still a buy?
Alphabet still isn't very expensive
As mentioned above, Alphabet was cheaper than the S&P 500. While it no longer holds that designation, it's only slightly more expensive now from a forward price-to-earnings (P/E) standpoint.
GOOG PE Ratio (Forward) data by YCharts
The S&P 500 trades at 21.6 times forward earnings, which is hardly valued at a premium, something that can't be said about many of its big tech peers. With Microsoft, Apple, and Meta Platforms trading at 36, 26, and 24 times forward earnings, respectively, it's still cheaper than its peers.
Valuing this cohort using forward earnings is a much better metric than using trailing earnings, as each is undergoing significant change due to AI influence.
Alphabet's first-quarter results will likely be available in late April (based on last year's release date), and investors will look to that to confirm their suspicions on why Alphabet deserves to be trading at higher levels. Some key focus points will be its advertising revenue growth and its operating margin. For ad revenue, if it can match or exceed Q4's 11% growth rate, it will be considered a success.
Operating margin is a key indicator of Alphabet's financial discipline, which came into question last year. It went through multiple layoffs and expense reductions to improve its positioning. As long as Alphabet maintains its current margin level, investors should be happy.
With Alphabet's stock trading at reasonable levels, plus a chance for a great quarterly report on the horizon, I'm confident that investors can buy Alphabet stock now without fear of overpaying.
