The past few days have seen a strong move upward in the share price of Google parent Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). Since the start of the year, Alphabet stock has risen around 30%.
That only puts it back to a little above where it stood a year ago though. So, is there still value here for investors after the recent climb?
Addressing a risk
One of the key reasons for weakness in the Alphabet stock price over the past year was investor nervousness about the impact of artificial intelligence (AI) on Google.
This has not worried me, as I figure that search will remain a large business. If AI has a role to play in it, I am confident that Google has as good a chance as anyone of coming up with a winning solution.
In the past few days, Google unveiled its AI offering. I expect this will evolve over time, but analysts cheered the development and the stock moved up in response.
AI is still a risk to Google, in my view, if it means users navigate directly to digital content without going through a search function first. Then again, Google monetised search through advertising. I think it can likely do the same with AI.
Strong assets
I reckon the concern about AI and other risks – such as TikTok leading to fewer videos being watched on YouTube – overlooks some of Alphabet’s strengths.
It has a massive user base and technical infrastructure. It has created well-known brands and built an ecosystem that hardwires them into people’s daily lives. The company has also mastered the art of turning user time online into money for the business. That is something that many rivals and AI start-ups struggle to do. It is a virtuous circle financially – the better Alphabet has become at targeting advertising, the more attractive it has become for advertisers.
Those attributes have helped turn Alphabet into a moneymaking machine. In the first three months of this year, it earned net income of $15bn.
Alphabet is far from a one-trick pony. Search is important to it, but it has also branched out into a wider range of related offerings. Its cloud business, for example, had revenue of over $7bn in the first quarter. That was a year-on-year growth rate of 28%.
Valuing the shares
Although I reckon Alphabet is an outstanding business, what about the valuation?
After all, the stock is markedly more expensive than when I bought it a few months ago.
Currently it trades on a price-to-earnings ratio in the mid twenties. That does not look cheap to me. I do not think it is necessarily expensive, if Alphabet is able to perform well in coming years and grow profits. But as well as AI, the company faces risks to profits such as a slowdown in advertising spending.
So I do not think the current valuation represents the bargain it did earlier in the year. For now, I will hold my Alphabet stock without buying any more.
