The "Magnificent Seven" refers to seven of the largest tech-focused companies by market capitalization -- Nvidia, Microsoft, Apple, Amazon, Alphabet (GOOG -0.73%) (GOOGL -0.85%), Meta Platforms, and Tesla.
These companies are known for outperforming the S&P 500 over the long term. In recent years, these stocks have been responsible for a significant part of broader market gains, especially in 2023. But a prolonged period of outperformance has stretched the valuations of top performers, like Microsoft, which just made a new all-time high.
The Magnificent Seven haven't been as dominant in 2025, with names like Apple and Alphabet underperforming the S&P 500. Alphabet is so beaten down that it has become less expensive than the S&P 500 by an important valuation metric.
Here's why Alphabet is in the bargain bin, and whether the stock is a buy now.
Image source: Getty Images.
Expectations are low for Alphabet
When folks first get into investing, one of the first valuation metrics they likely encounter is the price-to-earnings (P/E) ratio -- which is simply the price of a stock divided by earnings per share (EPS) over the last 12 months.
The P/E ratio has some major flaws. For starters, earnings can fluctuate wildly based on the economic cycle, the timing of orders from key customers, mergers and acquisitions, impairment charges, and a slew of other factors. So, putting too much weight on the P/E ratio can be a big mistake. Smoothing out the P/E ratio by comparing it to historical averages over a period of time or looking at operating income can be effective ways to get a better reading on a company's profitability.
Another useful metric is forward P/E. This is based on analyst consensus estimates for the next 12 months of earnings, rather than what has already transpired over the past 12 months. Looking at forward P/E in conjunction with trailing P/E is good for bridging the gap between what has happened and what is expected to happen. It's also good for finding a more accurate valuation metric for companies that had one-off charges which made their P/E higher or booked a one-off gain that made their P/E lower.
The S&P 500's forward P/E ratio is 21.8, which is higher than its historical average. However, it is still lower than the forward P/Es of every Magnificent Seven stock except Alphabet.
TSLA PE Ratio (Forward) data by YCharts.
Alphabet, with a mere 17.4 forward P/E, is a noticeable exception. For context, Alphabet's P/E ratio is only 18.6 compared to the S&P 500's P/E ratio of 28.4. So on both trailing and future expectations, Alphabet is cheaper than the benchmark, despite being such a dominant, industry-leading company.
The small difference between Alphabet's forward P/E and its current P/E implies that investors expect lower near-term earnings growth. Alphabet's discounted valuation compared to the S&P 500 also shows that investors don't view its earnings as high-quality or even unsustainable.
One look at Alphabet's revenue breakdown, and it's easy to see why investors are souring on the stock. Alphabet makes the vast majority of its revenue from services like Google Search, YouTube, Google Network, subscriptions (like Google One), devices (like Pixel), and platforms. It also has Google Cloud and a segment called Other Bets, which refers to projects like Waymo and GFiber. But Google Services is the main cash cow (for now).
Alphabet is addressing its weaknesses
In Alphabet's most recent quarter, Google Search brought in over $50 billion in revenue, which made up 65.6% of total services revenue. The sheer size of Google Search compared to Alphabet's other services like YouTube (even though YouTube continues to grow at an impressive pace) illustrates the company's dependence on Google Search. The company may be diversified on paper. But take out Google Search, and Alphabet wouldn't look nearly as cheap.
Google Search's seemingly impenetrable moat has been threatened by other information resources such as ChatGPT, Claude, TikTok, and Meta Platforms' Instagram. Given the rapid adoption of these tools, it's not unreasonable to assume that time spent on Google Search may decrease, which would directly affect Alphabet's ad revenue. But so far, that hasn't happened, and Alphabet hasn't been asleep at the wheel.
Alphabet made several blunders when it released its generative AI model, Bard, in 2023. But the rebrand to Gemini and AI integration for Google Search has led to Alphabet's most significant product upgrade in years.
In May, Alphabet released an advanced AI filmmaking tool called Flow, introduced an AI mode for search that enables reasoning, made upgrades to the Gemini app, and more. Alphabet may have initially been behind rivals like ChatGPT a couple of years ago. But Alphabet's AI tools, and especially Gemini, have come a long way in a matter of months. Yet, the stock remains at a dirt cheap valuation.
A compelling buy for long-term investors
Integrating Gemini across the Alphabet ecosystem could help accelerate the company's growth. But there's no denying that Google's days of being the undisputed leader in search are over.
Competition can throw a wrench into an investment thesis, but it isn't inherently bad. Without competition, Alphabet may have been much slower in its development of Gemini. So in that sense, Alphabet has become a better, more innovative company thanks to tools like ChatGPT.
As easy as it is to be pessimistic about the eroding dominance of Google Search, it's arguably also a mistake to assume that Alphabet's earnings will slow down. In fact, I could see Alphabet's earnings climb steadily higher -- supporting strong free cash flow generation, long-term investments, buybacks, and the company's dividend.
Add it all up, and Alphabet has become simply too cheap to ignore. It stands out as a strong buy now.
