The latest tech sell-off has been hard on many companies, including Alphabet (GOOG +1.99%) (GOOGL +1.71%). At its high, Alphabet attained a valuation worth over $2.5 trillion. Now, it sits at $2 trillion. That's a huge amount of value erased from one of the world's top tech companies in just a few weeks. But was the sell-off justified for Alphabet?
Alphabet is now the cheapest stock in the Magnificent Seven cohort by far, yet it has better finances than many of the others in that grouping. As a result, I think Alphabet is a solid buy here, but there is one thing investors need to look out for.
Alphabet's advertising business is the bedrock of the company
Alphabet is less recognizable as a brand of its own than it is for the companies that are under its umbrella -- Google, YouTube, and Android, among others. While that seems like a wide-ranging product lineup, the reality is that Alphabet's business is centered around one thing: Advertising.
NASDAQ: GOOGL
Key Data Points
Alphabet derives about three-quarters of its revenue from ads, so it's critical that it stay on top of its game in this sector. Alphabet has done this by developing various generative AI tools based on its proprietary Gemini model, which is part of the reason why it's spending so much on AI infrastructure.
For 2025, Alphabet informed investors that they should expect around $75 billion in capital expenditures, which is by far the most money it has invested in the business.
GOOGL Capital Expenditures (TTM) data by YCharts.
Another reason Alphabet is spending so much is its need to build its cloud computing infrastructure. Cloud computing is a huge component of the AI arms race, as few companies want the upfront cost of buying a data center outfitted with best-in-class graphics processing units (GPUs) and then maintaining it throughout its service life. they'd rather just rent the computing power and run workloads on the cloud.
Google Cloud is a top-three player in this sector and Alphabet's fastest-growing business unit, with revenue rising 30% year over year in the fourth quarter. The cloud computing market is growing rapidly and is still in the early stages of its buildout.
Alphabet's great balance between a steady bedrock business (advertising) and the upsides of AI and cloud computing makes for a fantastic investment story. However, there is one negative that must be considered.
The DOJ still wants Alphabet broken up
With all of Alphabet's success comes scrutiny, and the U.S. government has investigated it for a long time to understand if it was acting as an illegal monopoly. Former President Joe Biden's Department of Justice (DOJ) indicated that it wanted to break up Alphabet by forcing the sale of its Google Chrome browser. In a rare sign of agreement, President Donald Trump's DOJ has maintained that same opinion and will continue pushing for the breakup of Alphabet.
This is clearly a cause of concern for investors, but Alphabet will fight this action through the courts. Still, if Alphabet is broken up, it may be worth more as a separate business rather than one conglomerate, as Alphabet's stock looks dirt cheap right now.
GOOGL PE Ratio (Forward) data by YCharts. PE = price-to-earnings.
At 18.6 times forward earnings, Alphabet is much cheaper than the S&P 500 (^GSPC +1.20%), which trades for 21.2 times forward earnings. Furthermore, it's the cheapest Magnificent Seven stock, with Meta Platforms (META +1.81%) being the next cheapest in the cohort at 24.4 times forward earnings.
This shows how much pessimism is baked into Alphabet's stock, and I think that pessimism is why investors should swoop in and buy this dominant tech company for cheap. Although there are some concerns about how the company will look five years from now, it will take some time before a settlement is reached between Alphabet and the DOJ, giving it plenty of time to figure out a contingency plan.
I think Alphabet is a top buy in today's market, and investors looking for a bargain in the latest sell-off should have Alphabet near the top of their lists.
