The past few months might not have been a great time to be a tech investor. Or maybe they were – depending on an investor’s timeframe. Take Google parent Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) as an example. Alphabet stock has tumbled 28% in a year and now trades at less than $100 per share.
That might not sound like good news. But as a long-term investor, I see this as a brilliant opportunity to load up on Alphabet stock. That is exactly what I have been doing over the past couple of months.
Valuing Alphabet
When considering any share I might add to my portfolio, the questions I ask are what the company is likely to be worth in the long term and how that compares to the price at which I can currently buy its shares.
Although Alphabet stock is trading below $100 apiece right now, that still means its total market capitalisation weighs in at a massive $1.2tn. That is a lot of money.
But I think the company’s long-term earning potential means that valuation is actually cheap.
Last year, the firm made $60bn in net income. That suggests it is currently trading on a price-to-earnings (P/E) ratio of around 20. But earnings last year were 22% below the prior year level.
Although it is suffering from problems such as an advertising downturn, in the coming decades I expect the company’s earnings to grow not shrink. It has a large installed customer base, an ecosystem of services that makes it inconvenient for users to jump ship, a proven business model, and a powerful collection of brands.
On that basis, I think the forward P/E ratio for Alphabet stock is well below 20. I see that as an attractive price for such a high-quality company I think has strong prospects.
Buy now or wait?
However, clearly not all investors share my enthusiasm. Alphabet stock might actually go lower from here as investors have been pulling money from tech stocks. So Alphabet faces a variety of risks.
Although I am optimistic that advertising will bounce back, that might not happen any time soon. AI could also eat into Google’s core search business, while a raft of competitors could threaten to chip away at Alphabet’s position. On top of that, there is a long-term risk that regulatory action could hurt revenues at the firm.
So why have I been buying?
Waiting in the hope of Alphabet stock losing more ground and buying it even more cheaply is a form of market timing. And that is difficult, if not outright impossible.
Why wait? I see the current Alphabet stock price as offering an attractive valuation for such a great business.
I have been buying and plan to hold for the long term, so whether the price stays below $100 for a while is not important to me. In fact, if I had spare cash to invest, I would see that as a further buying opportunity for my portfolio.
