The "Magnificent Seven" cohort was thus named by Bank of America analyst Michael Hartnett, describing some of the market's largest stocks today. This group has led the market forward over the past few years and has delivered fantastic returns to investors. It's made up of:
Despite its size, this group is known for its strength and growth and normally receives a premium valuation as a result. However, there's one that escapes this trend: Alphabet. Alphabet's stock has reached very low levels, and I think it looks like an excellent bargain if you've got the stomach for some of the challenges it brings.
Image source: Getty Images.
Alphabet's stock comes with some increased risk
Alphabet is the parent company of multiple brands, but some of the most notable are Google, YouTube, the Android operating system, and Waymo. Although Alphabet's business is fairly broad, most of its revenue comes from advertising via YouTube and its dominant Google search engine. Advertising accounted for about 75% of Alphabet's total revenue in Q1, so it's clearly important to the business. Furthermore, advertising is its most mature area, generating the bulk of Alphabet's profits and allowing it to reinvest in other high-growth areas like Google Cloud and Waymo.
This is the first problem investors see with Alphabet's stock, as advertising is cyclical. Ad budgets tend to get cut as companies prepare for economic downturns, and there's a prevalent fear that President Donald Trump's tariff plan could plunge us into a recession, or at the very least, a downturn. Only time will tell if this forecast is accurate, but Alphabet's Google Search and YouTube ads each delivered 10% year-over-year growth in Q1, so this weakness hasn't shown up yet. We'll have to keep an eye out during Q2 results to see if these growth rates decline, but as of right now, Alphabet's financials do not support this thesis.
Another fear is that Google Search, Alphabet's cash cow, could be replaced by generative AI technologies. While this is a possibility, Google already integrated AI search overviews and has launched several competitive generative AI offerings. Management was very bullish on AI Overviews and stated that it's an incredibly popular feature with more than 1.5 billion monthly users.
While Alphabet may lose some market share over the long term, it's still growing revenue at a double-digit pace, so there's not much to be concerned about. Furthermore, generative AI has been around for nearly three years and has been incredibly useful for at least the last year and a half. Google Search is still performing well despite that headwind, so I'm not as concerned about this headwind as the market is.
Perhaps the biggest elephant in the room is the question, "What will Alphabet look like in five years?" I'm not talking about how various generative AI technologies could affect Alphabet's dominance; I'm talking about Alphabet being found guilty of operating an illegal monopoly in its advertising platform and search engine. Various ideas have been floated around about how to remedy these issues, but Alphabet will fight to ensure its company stays intact.
We're years away from learning the outcome of these lawsuits, and each will likely end up in front of the Supreme Court. Until an end is reached, I'm still looking at Alphabet as a whole; anything else is just speculation.
Alphabet is still posting excellent results
I believe Alphabet's stock looks like a bargain because it's cheaper than the broader market, yet it is growing its earnings much faster. With the broader market trading for 22.4 times forward earnings (as measured by the S&P 500), Alphabet's 17.6 times forward earnings looks like a bargain.
GOOGL PE Ratio (Forward) data by YCharts
Alphabet is also the cheapest "Magnificent Seven" stock by a wide margin, with the next cheapest stock (Meta Platforms) trading for 26.3 times forward earnings.
Despite its cheap stock price, Alphabet posted the second-best net income growth in Q1, rising 46% compared to Nvidia's 64% growth. On the revenue side, it's exactly in the middle, beating Amazon, Apple, and Tesla.
If all you did was look at Alphabet's finances compared to its peers, you would conclude that it would be worth much more than it is today. However, because of the various narratives surrounding Alphabet's stock, it trades at a deep discount to its peers and the market. Although some investors may not be comfortable investing in Alphabet's stock due to the impending government action (which is a fair reason to avoid the stock), I think the other reasons for Alphabet's stock trading at a discount aren't as valid.
If Alphabet can fend off generative AI and the government over the next few years, it could easily be one of the top-performing "Magnificent Seven" stocks to own. However, it has an increased risk compared to its peers, which is why the stock trades at a discount.
