When I last covered Alphabet (NASDAQ: GOOG) stock, on 19 May, I said that those considering buying might want to wait for a better entry point. At the time, the stock was at very high levels and sporting a lofty valuation.
Fast forward to today and Alphabet is looking a lot cheaper – after hitting an all-time high of $404 in May, it has fallen to $318, a decline of around 21%. So, is now the time to consider buying the Magnificent 7 stock?
Why has the Big Tech player tanked?
First, let’s look at why it has tanked. What’s going on that has sent the share price down more than 20%?
Well, one factor has been delays to the release of its latest Gemini model. This has raised fears that other companies like OpenAI and Anthropic could pull ahead in the generative AI race.
Another factor has been an $85bn equity raise to fund its AI buildout. This has spooked investors as it represents a change in the company’s capital allocation policy.
A pause in share buybacks has also hit sentiment towards the stock. In Q1, Alphabet made zero buybacks for the first time in almost a decade.
The fact that the company increased its AI capex guidance in its Q2 earnings clearly impacted sentiment too. It now expects to spend a whopping $195bn–$205bn this year.
It’s worth noting that there’s been a bit of a shift in the market recently where capital has moved from AI capex spenders to AI capex receivers. This has seen money flow out of stocks like Alphabet and Microsoft towards chip stocks and data centre plays.
Finally, as I said at the start, the stock was expensive back in May. The price-to-earnings (P/E) ratio was in the high 20s whereas for most of the last decade it has been in the 15–20 range.
Is this an opportunity?
So, there’s obviously a lot to process here and a few risks have emerged. But are we looking at an attractive risk/reward proposition after that 21% fall in the share price?
I think we are. Because in the long run, Alphabet has so many ways to win.
Not only does it have a ton of potential in cloud computing, AI, and chips, but growth could come from YouTube, self-driving car unit Waymo, and of course, search. Given its diversified operations, I’m relatively confident that this business will get bigger over the next five to 10 years.
As for the valuation, it now seems very reasonable. Looking at earnings forecasts, the P/E ratio is 18.5 although this rises to 21.7 using next year’s earnings forecast.
So, I think the stock is very much worth considering at current levels. I see this as a good entry point.
It’s worth pointing out that Warren Buffett’s investment company, Berkshire Hathaway, recently made a large bet on Alphabet. And this trade was made by Buffett himself.
Should you invest £5,000 in Alphabet right now?
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Edward Sheldon owns shares in Alphabet and Microsoft
