The "Magnificent Seven" stocks have been some of the best performers in the market over the past five years and represent a significant portion of the large-cap tech stocks. While some may think these stocks are expensive, one doesn't fit that narrative: Alphabet (GOOG +3.52%) (GOOGL +3.57%).
Alphabet's stock looks cheap compared to its peers and the broader market. However, its growth is similar to that of its peers, so this imbalance doesn't make much sense. As a result, I think the company can be one of the top performers of this cohort, because the combination of value and growth doesn't commonly occur.
NASDAQ: GOOGL
Key Data Points
Alphabet's cheap valuation can be tied to a potential breakup
Alphabet is the parent company of Google, YouTube, Android, and many other brands. While it has its fingers in many industries, the biggest revenue driver is advertising. It makes up around three-fourths of total revenue, so as long as its advertising platform stays at the top, its business will continue thriving.
However, many investors are worried that it won't. The company has long been the target of lawsuits claiming that it operates as an illegal monopoly, and federal regulators with the Department of Justice are trying to do something about it.
It's seeking to force the sale of the Google Chrome browser, which the DOJ believes would level the playing field. Former President Joe Biden's DOJ started this process, and it appears that President Donald Trump's administration will continue on this path.
However, Alphabet is fighting as hard as possible to avoid this breakup, since it believes that a split could significantly harm the economy and national security.
This potential breakup is hanging over investors' heads right now, and it's one of the main reasons the stock is so cheap. Compared to its Magnificent Seven peers, it trades at a steep discount when the forward price-to-earnings ratio (P/E) is used. (Tesla has been removed from the chart because it trades for more than 100 times forward earnings and exceeds the vertical scaling.)
NVDA PE Ratio (Forward) data by YCharts.
Furthermore, Alphabet's stock trades for less than the S&P 500, which is valued at 21 times forward earnings. This conveys the extreme pessimism surrounding it, especially when its earnings are factored in.
Alphabet can deliver sustained earnings growth
The company is also growing at a respectable pace, with revenue rising 12% in the fourth quarter. For 2025 and 2026, Wall Street analysts expect revenue 11% higher in both years.
Alphabet also repurchases lots of its stock with its cash flows, and it bought back around $15 billion of it during the fourth quarter. That's about 3% of the company annually, so it also gets a nice boost to its earnings per share (EPS) each year from those activities.
This leads to double-digit growth in EPS, which is more than the broader market typically generates. As a result, Alphabet could easily crush the market in the future. However, there is a risk that a Google Chrome sale could derail that, which is why there is pessimism baked into the stock.
I wouldn't be surprised if an alternative deal is struck or some other remedy is found, as Google Chrome may be too entangled to separate from the company. As a result, I'm not worried about the potential breakup.
But even if it is broken up, spun-off companies usually unlock a fair amount of value when split off on their own, so investors may see more returns from that aspect as well.
Alphabet is too dominant a business to ignore, as some investors have. Its fantastic track record plus cheap valuation make it a rare combination of a growth and value stock. These have a tendency to stomp the market when the time frame is stretched out, which is why I think Alphabet is one of the best Magnificent Seven stocks to buy right now.
