This dominant tech firm has led the market over the past decade.
Shares of Alphabet (GOOGL 0.75%) (GOOG 0.89%) are up 16% in 2024 (as of Sept. 24). While that’s a healthy gain, it underperforms the broader Nasdaq Composite Index.
But over a longer period, like the past decade, Alphabet has crushed the overall market. Therefore, with shares off 15% from their peak, there could be a rare opportunity here for investors to add a perennial winner to their portfolios.
Here’s why I think this “Magnificent Seven” stock is a buy right now.
Secular trends
This business has become a dominant global tech titan. And it’s in a favorable position because it benefits from some powerful secular trends. The company is a leader in the digital advertising market, thanks to its incredibly successful Google Search service. According to Statcounter, the search engine has 90% of market share worldwide.
There are billions of search queries every day. This attention is monetized by Alphabet. With the digital advertising industry estimated to grow more than 15% per year through the rest of the decade, the company is set to continue gaining.
Alphabet also owns and operates YouTube, the most popular streaming platform in terms of daily TV viewership in the U.S., according to data provided by Nielsen. As more households decide to ditch their traditional cable subscriptions in favor of the lower cost and greater convenience of streaming, YouTube should draw in more viewers. In turn, this will lead to greater ad revenue for the business.
Then there’s cloud computing. Google Cloud is the third-leading cloud platform in the world, behind only Amazon Web Services and Microsoft Azure. Google Cloud posted 29% year-over-year revenue growth in Q2. And even better, it generated $1.2 billion in operating income, good for an 11% margin.
Even though Alphabet generated almost $85 billion in sales in the second quarter, which is a massive sum, it’s easy to be bullish that the solid growth will continue for the foreseeable future based on these secular tailwinds. Wall Street consensus analyst estimates call for top-line gains of 11.7% per year between 2023 and 2026. This double-digit outlook is encouraging, especially considering the size of this company today.
Strong financials
Another reason that Alphabet makes for a smart investment candidate is because of its robust financial standing. This is an extremely profitable enterprise. In the past five years, Alphabet’s operating margin has averaged a superb 26.6%.
That bottom-line performance leads to impressive free cash flow. Management has historically used this to repurchase outstanding shares. And just recently, the company introduced a dividend.
There’s virtually zero risk of Alphabet running into financial trouble anytime soon. Besides its strong profits, the business has a clean balance sheet. As of June 30, it had $101 billion of cash, cash equivalents, and marketable securities, which is significantly more than the $13 billion of long-term debt the company carries.
Operating from a position of financial strength gives Alphabet the resources to invest aggressively behind artificial intelligence initiatives.
Alphabet’s valuation
Alphabet proves that compelling investment opportunities can be hiding in plain sight. This is a $2 trillion business that hardly goes unnoticed.
However, the stock trades at a forward price-to-earnings ratio of 21. This represents a substantial 27% discount to the broader Nasdaq-100. I don’t believe this valuation is justified, given Alphabet’s growth prospects, as well as its strong financial profile.
Investors shouldn’t overthink this: Buying shares of Alphabet and holding for the next three to five years looks like a smart move.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.