Alphabet (GOOG -0.35%) (GOOGL -0.31%) had an excellent day on Wednesday, Sept. 3. The stock rocketed 9% higher, which is quite impressive considering Alphabet's monstrous size. This pop helped Alphabet establish a new all-time high, which may give some investors pause about investing in Alphabet right now.
However, I think that's a mistake. There's a lot to like about Alphabet, even if you must pay 9% more for the stock. I still think Alphabet is among the best stocks to buy right now, and I think it can be one of the top-performing big tech stocks over the next few years.
Image source: Getty Images.
Why did Alphabet's stock rise so fast?
Alphabet received positive news from the courts regarding its antitrust case late Tuesday, Sept. 2, which caused the stock to rocket higher the next day. While the DOJ was seeking to break up Alphabet by forcing the sale of its Google Chrome browser, the judge decided that this was too extreme a remedy and instead required Alphabet not to have exclusive contracts for using its browser. Alphabet will still be able to pay to have its browser set as the default on some platforms (like the iPhone), which maintains its standard operating practices.
This fantastic news caused the stock to rocket higher, but there was one interesting note in the ruling. The judge also mentioned that this could be a difficult time for Alphabet, as it faces new challenges from generative AI companies, such as OpenAI's ChatGPT. This is the primary remaining bear case against Alphabet, as many are worried that Google could become a thing of the past as generative AI technologies become more widespread.
However, I think management has already fended off that threat.
Google Search is still dominant
While some have defected from Google to generative AI models, Google remains the dominant search engine, used by billions worldwide. Google has also done a phenomenal job creating a hybrid platform that incorporates generative AI-powered summaries at the top of each search result, which will likely bridge the gap needed to prevent users from defecting to another platform.
This success was on display during second quarter results when the Google Search division reported sales growth of 12%, which isn't the sign of a declining business. Overall, Alphabet's revenue increased by 14% and diluted earnings per share rose by 22%.
Alphabet is executing at a high level, and with the company winning the court case, it may allow Alphabet to achieve a valuation that's more in line with its big tech peers.
Alphabet's stock is still cheap despite the pop
The S&P 500 (^GSPC 0.21%) trades for 24 times forward earnings, which is quite expensive historically. Some of Alphabet's major tech peers are even more expensive, trading in the high 20s to low 30s range, despite growing at about the same pace as Alphabet.
Even after the stock price pop, Alphabet's stock trades at a discount to the market and its peers.
GOOGL PE Ratio (Forward) data by YCharts
A forward earnings multiple of 23.2 isn't a cheap stock price, but I wouldn't be surprised if the market were willing to pay a similar premium to other big tech companies, which gives the stock plenty of upside over the next few years.
Alphabet isn't out of the woods when it comes to the AI arms race, but its recent successes in this industry lead me to believe that it will be one of the major winners in this battle. Alphabet remains one of the best stocks to buy today, and I believe investors will enjoy market-beating returns over the next five years by purchasing shares now.
