Companies with a market cap above $1 trillion are in a class of their own. They all have terrific businesses and have generally produced market-beating returns for years.
And though it might seem odd to say that a corporation of this stature is being underrated, in my view, that's exactly what's happening with Alphabet (GOOG 0.66%) (GOOGL 0.78%). The tech leader has lagged the market this year and trades at attractive levels relative to its growth potential, making the stock a no-brainer buy today.
Here's why investors should seriously consider this stock.
Image source: Getty Images.
Multiple growth avenues
Alphabet has been an innovator since its early days. Google wasn't the first or the only search engine around, not by a long shot. It just won the race to dominate the field. And Alphabet has never stopped improving this product. The company has made (and continues to make) numerous changes and tweaks to Google to enhance the user experience and help people find more relevant answers to their queries.
Alphabet then pounced on the massive cloud computing opportunity through Google Cloud. The company is now leveraging artificial intelligence (AI) to offer a suite of AI-related services through its cloud computing arm.
Furthermore, Alphabet acquired YouTube, the internet's leading video streaming platform, and now offers services that enable it to compete with traditional cable providers. Here's one more example: Alphabet owns Waymo, one of the leading companies working on self-driving vehicles.
Alphabet's track record proves that it has been a perennial innovator.
The past may not matter that much to investors, but the company's innovative efforts will continue to pay off for many, many years to come.
First, Alphabet should remain the leading search engine company for a long time, a business that helps it generate billions in ad revenue. The digital advertising market is projected to continue its upward trajectory. Although some thought the rise of ChatGPT-like AI chatbots would decrease traffic on Google, Alphabet has adapted and now provides an AI Overview to its search engine.
Second, AI and cloud computing will also prove to be massive long-term tailwinds, as they enable businesses to improve efficiency and productivity, which is something every company strives to achieve.
Third, YouTube's streaming ambitions look highly promising. Although YouTube's main platform isn't directly comparable to Netflix (the former hosts a lot of user-generated content versus the TV shows and movies the latter offers), it's worth noting that in May, YouTube captured 12.5% of television viewing time in the U.S., significantly higher than Netflix's 7.5%.
YouTube beating out the world's leading streaming service is still noteworthy, even if it's not an apples-to-apples comparison. Higher engagement on the platform will lead to increased ad revenue for Alphabet over the long term.
Lastly, Waymo operates ride-hailing services using its self-driving vehicles in several major U.S. cities, including San Francisco and Phoenix. Though it will take time, there is a good chance that these will become much more widespread and, eventually, meaningfully contribute to Alphabet's financial results. Alphabet is helping build the future, and in the future, the company will be rewarded for it. And so will the tech leader's shareholders.
The price is (more than) right
Alphabet's forward price-to-earnings ratio of 19.2 is slightly lower than the average for the communication services sector, which is 19.7. That's somewhat surprising, as market leaders with excellent growth prospects typically trade at a premium. Perhaps the market is factoring in the possibility that Alphabet may lose its Chrome browser due to an ongoing antitrust battle in the U.S.
That's fair enough, but at current levels, the stock looks attractive even if regulators get what they want. To be clear, it will be a blow to Alphabet.
However, given the company's incredible innovative culture -- which, in my view, is its biggest strength -- a significant cash flow of $74.9 billion over the trailing-12-month period, and multiple growth paths, most of which will remain untouched even in this worst-case scenario, the stock still looks like a no-brainer buy.
