It may seem odd to think about finding value among seven stocks worth over $1 trillion. But this is worth discussing in the case of Alphabet (NASDAQ: GOOGL). The Google parent company has the lowest forward valuation multiple among the Magnificent Seven stocks. Using a forward P/E of 22x for the S&P 500, it is also the only Magnificent Seven stock trading below or equal to the broader market valuation.
That might feel a bit out of place, considering the firm just announced a breakthrough in quantum computing. Still, there are certainly concerns around this company that are weighing on shares. I’ll break down and analyze Alphabet’s key business segments and provide my outlook on this tech stock.
Google Search: Still the King of Internet Searching Despite Chatbot Fears
The biggest revenue driver for Alphabet is Google Search. Companies pay Google for ad placement on their search results and are charged when users click on their ads. Google Search accounted for around 55% of total revenue last quarter. This revenue concentration is one factor weighing on Google. As more people discover the often-superior search capabilities of chatbots like ChatGPT, analysts fear a loss of traffic to Google Search.
So far, that hasn’t caused Google Search revenues to suffer. They have grown by over 10% from the previous year in each of the last five quarters. However, ChatGPT does appear to be taking market share as a primary search engine. A good sign is that the loss in market share was less significant in shopping and travel searches. These types of searches generate a lot of ad sales.
Google is fighting against the rise of chatbots. The company will reportedly roll out an “AI Mode” within Google Search. It aims to keep the familiar nature of Google Search, combining it with the Gen-AI capabilities of its Gemini model. Google has billions of daily users, making it still many times larger than ChatGPT’s 300 million weekly users. As Google adds new AI features, I believe it can keep its huge search market share. Users are extremely familiar with its product. Additionally, ChatGPT is not that new at this point; it is just over two years old. The fact that Google Search revenues remain strong is a good sign for the future.
The potential antitrust breakup of Google Search is another concern; however, the company will fight this tooth and nail. It will likely appeal any decisions that go against it, delaying real impacts for several years.
Alphabet’s Other Businesses Are Strong, Waymo and Quantum Add Long-Term Upside
Aside from Search, Alphabet has several other important revenue-generating parts of its business. This includes revenue from YouTube ads, third-party ad sales, subscriptions, platforms, device revenue, and Google Cloud revenue. Each of these four segments made up between 8% and 13% of total revenue last quarter. Almost all of these saw solid growth last quarter. The third-party advertising business has been declining steadily; however, it is the smallest of these segments.
The push away from traditional television is a secular trend that is a strong tailwind for YouTube ad revenue. Additionally, the Google Cloud business is seeing accelerating growth. Overall, the vast majority of Alphabet’s business remains strong. The company’s “Other Bets” segment is where exciting long-term potential lies despite not helping generate much revenue right now.
Two massive projects that fall into this segment are Waymo and Google Quantum AI. The company is establishing itself as a leader in two potentially huge technologies of the future: autonomous driving and quantum computing. Waymo was the first to complete fully autonomous trips on public roads in 2017. It is now the leader in robotaxi services. Experts project that the overall ride-sharing market will nearly quadruple in size by 2032.
Google's recent unveiling of its Willow quantum chip was a breakthrough. It set off a huge rally for other quantum stocks. This is a much more long-term bet that won’t bear fruit in terms of revenue for at least several years. However, it could be huge if quantum computers can eventually outperform supercomputers in commercially relevant applications.
Alphabet Could Be One of the Best Magnificent 7 Stocks to Own
Overall, Alphabet’s business remains strong, and signs point to its ability to hold onto much of its dominance. The company’s long-term bets in potentially world-altering areas add upside investors shouldn't ignore. Its valuation, compared to the other Magnificent Seven stocks, could make it one of the best long-term plays among the group.
The article "Why Alphabet Could Be the Best Magnificent 7 Stock to Own" first appeared on MarketBeat.
