Key Points
Investors are worried that the Google Search usage rate will fall.
The stock is growing far faster than the historical average of the market.
Alphabet’s stock is quite cheap for its growth.
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It’s hard to pick just one growth stock as the smartest to buy right now, but I think it’s a worthy exercise for investors to go through. It helps determine what they value in a business and how confident they are in their pick. For me, it’s Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL).
While Alphabet may not seem like a growth stock, it fits the general definition. Furthermore, Alphabet is a growth stock that’s trading like a value stock, making it even more attractive.
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I think it’s one of the best stocks available on the market, and investors should highly consider adding some to their portfolio.
Image source: Getty Images.
Alphabet’s growth easily places it in growth stock territory
Alphabet is the parent company of many brands, but most notably, Google Search. This is where more than half of Alphabet’s revenue comes from, and it’s under attack.
Many investors are worried that generative AI will replace Google Search. This would cause Alphabet’s revenue to tumble and drag the stock along with it. However, I think that’s an outdated analysis. Google Search has integrated AI search overviews, which provide a generative-AI-powered search summary at the top of each Google result.
While some may prefer a full-on generative AI experience, the general population is already locked into their habits of using Google, and any real exodus from the platform could take years to show up. Right now, Google Search is doing quite well, as it delivered 12% revenue growth for the second quarter.
That’s not a sign of a struggling business, and it shows that Google Search isn’t going anywhere.
Another exciting division for Alphabet is Google Cloud, its cloud computing division. Cloud computing has two primary growth drivers: A general shift to the cloud in standard workloads and AI workloads.
Instead of keeping expensive and quickly outdated computing hardware on premises, companies are running more workloads in the cloud, which allows them to easily scale their computing power based on demand. For AI, computing equipment is incredibly expensive, and most companies can’t justify spending millions of dollars for hardware that may not be used 24/7. As a result, they rent the computing power from Google Cloud necessary to train and run AI models.
This industry is rapidly growing and slated to increase dramatically over the next few years. Grand View Research projects that the cloud computing market will expand from $752 billion in 2023 to $2.39 trillion by 2030. That’s a growth rate of 20%, and Google Cloud is one of the leaders in this area.
In Q2, Google Cloud’s revenue rose at a 32% pace, and its operating margin rose to 21%. Google Cloud is one of the most important growth segments Alphabet has, and its continued success will continue boosting the company-wide growth rate.
As a whole, Alphabet is doing phenomenally well, with revenue rising 14% in Q2 and diluted earnings per share (EPS) rising 22%. The broad definition of a growth stock is a company that is growing faster than the market. With the market’s long-term growth hovering around 10%, it’s safe to say that Alphabet meets the criteria.
However, it also meets the criteria of a value stock.
Alphabet’s stock looks like a bargain
While a value stock may have multiple definitions, a common one is that the stock is valued lower than its peers in a similar industry or lower than the broader market. The S&P 500 (SNPINDEX: ^GSPC) is trading for 24.1 times forward earnings, so a stock needs to be worth significantly less than that to be considered a value stock, as this valuation is historically expensive.
Alphabet’s stock trades for 20.2 times forward earnings, which I believe makes it a value stock.
GOOG PE Ratio (Forward) data by YCharts
Furthermore, when you compare it to other big tech stocks that trade in the high 20s to mid-30s forward P/E, Alphabet’s stock looks like a downright bargain.
Alphabet is a rare company that can blend growth and value, making it a no-brainer stock to scoop up right now. I believe it’s one of the smartest stocks investors can buy right now, and they will be sitting on a solid profit five years from now.
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Keithen Drury has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.
