Google Stock Is An Undervalued Asset With Prospects
Summary
Alphabet has an established revenue-generating business. And it also has growth prospects through the development of AI.
The recent drop in the company’s share price has resulted in a severe undervaluation, with the company’s P/E falling to 21 units, one and a half times lower than the US market average.
Even if the U.S. market is weak in 2025 and AI isn’t about to produce a return on investment, Google is an attractive buy.
In the long run, any market decline is an opportunity to buy cheaper company stocks. And in the current decline, I would favor Google (Alphabet Inc) stock.
Google’s business and outlook
In the stock market, there are only two types of investments. The first is you buy a company’s growing business, with the expectation that the company will make more money in the future and that the growth of its stock will be based on that. The second type is a banal opportunity to buy cheaply the business that is already worth more now.
In the first case, you need to somehow look into the future and understand it. And with that, you need to understand the place of different companies in the future economy. You need to find something that doesn’t exist yet, but that can be assumed. In the second case, you need to find an undervalued asset that is cheap relative to the company’s existing business.
For example, buying NVIDIA stock, that’s the first option, in the form of buying a prospect. Or if you see a company whose P/E is 50 or even 100, that ratio is clearly not about the company’s current business, but about its prospects and future earnings.
The rise in NVIDIA stock has been largely based on what the company can earn in the future. And this company’s huge trillion-dollar capitalization is essentially based on dreams and an assessment of the future.
Google, too, has a future. After all, Google is also in the race to develop AI. And if NVIDIA is the company that makes the basic means (means of production) for the development of AI. Google creates AI itself, and let’s say I use Google’s product — Gemini. Therefore, Google will be able to make money on AI only when AI is used to create products for the end consumer.
Right now, there is an investment boom in the AI industry. Companies are spending a lot on investments so they are buying a lot of hardware, building data centers, and creating infrastructure for AI. And in this phase, the company that benefits the most is NVIDIA, which manufactures this hardware. But in the end, all of these investments are made to make AI work and make a profit, to make a lot of AI-related products for the end consumer. But that’s another stage that hasn’t come yet. But without this stage, the whole development of the AI industry is meaningless.
Google is better positioned in this regard than perhaps anyone in the world. Google’s search engine is used by billions of people around the world. And Google thus has direct access to the consumer and therefore in terms of marketing and sales of AI products Google is better positioned.
Google is the company that can start monetizing AI before anyone else because Google has the infrastructure to do so.
Google’s business is very diverse but mainly centered around online advertising, cloud computing, software, and hardware.
Google’s main source of revenue comes from ads placed on Google’s search engine, YouTube, and other platforms.
Google Cloud Platform (GCP) provides cloud services such as data storage, computing, and machine learning to businesses and developers.
Google develops and supports a wide range of software products, including the Android operating system, the Chrome web browser, and the Google Workspace suite of office applications.
Google also makes hardware devices such as Pixel smartphones, Nest smart home devices, and Chromecast media streaming devices. Below you can see a breakdown of Google’s revenue by segment and by region.
Revenue by component (Company report for 2024)
Revenue by region (Company report for 2024)
And most importantly Google has a huge customer base. And because of that it has a huge potential to implement AI and sell AI products to end consumers. But this is a prospect that has not yet come and it is assumed that it will come when the development of the AI industry will move to another stage, when AI products will be sold.
So, what I’m saying is that Google, just like NVIDIA, has an opportunity and a huge opportunity with AI. And Google’s business could potentially grow in the future due to AI development.
Google’s business and current state
But beyond the prospects, Google already has a huge business with very strong financials. At its current capitalization of $2.1 trillion with a share price of $170 apiece, the company has $350 billion in revenue and $100 billion in profit in 2024. Compared to 2023, revenue is up 13% and profit is up 35%. You can see the financials in more detail in the table below.
Key financial indicators of Alphabet, mln. dollars (Yahoo Finance)
It is very important to note that at the current moment, at the price per share of 170 dollars, such an indicator as P/E is only 21 units.
For comparison, Apple’s P/E is 37 units, Microsoft’s is 30 units, NVIDIA’s is 39 units, and the average for the S&P 500 index is 29 units. That is, Google’s profit-to-capitalization ratio is even lower than the average for the U.S. market.
Revenue and net income (Based on company data )
But the company’s business is growing steadily year after year. The company is making a steady profit. And in my opinion, it is now undervalued by the markets by a factor of one and a half. This concerns only the current business of the company without taking into account the prospects related to the development of AI.
What is the reason for the weakness of the company’s stock?
Over the last month, the company’s shares have fallen in price very much, from 206 dollars per share to 170 dollars. There are many reasons for the drop. The first is something to do with the company itself. Here, the basis for the stock drop was that investors saw the huge investment that the company plans to direct to the development of AI. The company plans to allocate 75 billion dollars for this purpose.
Investors, if estimates are to be believed, were afraid of whether these expenses were justified. It is also likely that the company’s statement that by the end of 2024, the demand for AI exceeded the company’s capabilities played a role. And the emergence of Chinese competitor DeepSeek probably also played an important role.
The second is that the US stock market in general has declined due to disappointment with the future Fed policy, Trump’s duties, and the risk of trade wars. In this regard, I’m guessing that investors are probably most worried that retaliatory measures by other countries could affect Google.
Risks to the company
The main risk for the company is the risk that the hopes for AI development will not be realized and there will be no AI-based products that can monetize the technology in the coming years.
This can be compared to the dot-com boom in 1999–2000 when investors believed in the development of the Internet, computer technology, and software. And investors were not mistaken in their expectations, because later this boom happened, and we have seen it and are already living in it. But it did not happen as fast as we wanted in 2000, and therefore the overheated market then fell without waiting for a quick return.
And the current risk associated with AI is very similar, to the situation in 1999–2000. I am sure that eventually AI will give a huge boost to humanity’s development, create whole new industries in the economy, and create a huge number of new goods and services. But it may not happen as quickly as investors want. And before AI develops, it may take enough time for investors to run out of patience.
But that’s partly why I’m paying attention to Google. After all, if AI doesn’t deliver fast results, companies whose growth is now based on faith in the future without current strong performance could fall in value. Google, on the other hand, has a working business that is already profitable on its existing technology. And a P/E of 21, which is lower than the U.S. market average suggests that there is no overheating in the stock.
And of course, the company’s stock dynamics will follow the general dynamics of the U.S. market. And if the market as a whole falls, I think that even though the company’s stock will be better than the market as a whole, it will not be able to grow in a falling market. And there is such a risk, and I described it in one of my articles.
The stock has gotten very cheap
But for all these problems, I believe the stock has become very cheap. A P/E of 21 units, for a company with a stable business that itself can be valued at one and a half times the current share price (where the P/E would be 30 units, like the market average). At the same time, in addition to the existing business that is already profitable, the company has huge future growth prospects related to AI development.
Investors’ worries about large investments are a contradictory factor. After all, on the one hand, it increases costs. But, on the other hand, it is an investment in the future increase of the company’s performance. It means the development of the company. And in the future, these investments can give a strong impetus for development. So I don’t think that big investments are a bad thing.
As for the trade wars, the most important point is that Google does not operate in China!!!! And so China’s retaliatory measures cannot affect the company’s business. As for other regions, for example, Europe simply does not have its own tech giants like Google. And they simply have nothing to replace Google, just like Canada and Mexico. Therefore, the retaliatory measures from Europe are unlikely to affect Google.
Google has an existing business, which in itself justifies a stock price one and a half times higher than the current one. And as the company has prospects to grow its AI-related business among the leading players in this market. Also after the price drop, I believe that there is no such factor as overbought in the quotations, and on the contrary, the company’s shares can be called oversold at the moment.
Technically in quotations it is possible to distinguish the simplest support line, from which it is worth buying.
GOOG chart, weekly (MT4)