Alphabet Is the Cheapest "Magnificent Seven" Stock on This Key Valuation Metric. Does That Make the Stock a Buy?
Investors are heavily discounting Alphabet's future. This may present an opportunity.
At the end of the day, earnings will drive stock prices. A company is worth the cumulative profits it generates for shareholders, discounted back to today. As investors, we want to buy a piece of these earnings -- what you are doing when buying a stock -- as cheaply as possible. One way to measure the cheapness of a stock is to look at its forward price-to-earnings ratio (P/E), which takes the current market cap and divides it by Wall Street estimates for earnings over the next 12 months. The lower the number, the better.
Today, Alphabet (NASDAQ: GOOGL)(NASDAQ: GOOG) is trading at one of its lowest forward P/E ratios ever. In fact, Alphabet has the lowest forward P/E ratio of any Magnificent Seven stock. Does that mean you should buy the stock for your portfolio today? Let's analyze Alphabet's business in the age of artificial intelligence (AI).
Alphabet is the parent company of Google, YouTube, Google Cloud, DeepMind, Waymo, and other technology subsidiaries. Mainly, its profits come from Google Search and related properties.