Alphabet Stock Is Cheaper Than the S&P 500: Here's Why

Alphabet Inc. (GOOGL), the parent company of Google, has been a powerhouse in the tech industry, consistently delivering impressive financial results. However, the stock has been trading at a discount compared to the broader market, making it an attractive investment opportunity. Let's explore why Alphabet stock is cheaper than the S&P 500 and why investors should consider adding it to their portfolios.



First, let's examine some key valuation metrics that indicate Alphabet's stock is undervalued compared to the S&P 500 index:

1. Price-to-Earnings (P/E) Ratio: Alphabet's P/E ratio is 22.34, which is lower than the S&P 500's average P/E ratio of around 25. This suggests that Alphabet's stock is relatively cheaper compared to the broader market.
2. Price-to-Sales (P/S) Ratio: Alphabet's P/S ratio is 6.32, which is lower than the S&P 500's average P/S ratio of around 2.5. This indicates that Alphabet's stock is more affordable based on its sales compared to the broader market.
3. Price-to-Book (P/B) Ratio: Alphabet's P/B ratio is 6.75, which is lower than the S&P 500's average P/B ratio of around 7. This suggests that Alphabet's stock is relatively cheaper compared to its book value compared to the broader market.
4. Price-to-Cash Flow (P/FCF) Ratio: Alphabet's P/FCF ratio is 30.10, which is lower than the S&P 500's average P/FCF ratio of around 15. This indicates that Alphabet's stock is more affordable based on its cash flow compared to the broader market.
5. Enterprise Value (EV) to Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) Ratio: Alphabet's EV/EBITDA ratio is 16.39, which is lower than the S&P 500's average EV/EBITDA ratio of around 18. This suggests that Alphabet's stock is relatively cheaper compared to its EBITDA compared to the broader market.



Alphabet's earnings growth has been robust, outpacing the broader market. In 2024, Alphabet's earnings grew by 35.67% compared to the previous year, while the S&P 500 index grew by approximately 10% during the same period. Analysts expect Alphabet's earnings growth to continue in the coming years, with an average EPS growth forecast of 16.15% for the next five years. This expected earnings growth is higher than the expected EPS growth rate for the S&P 500 index during the same period.

Alphabet's revenue growth has also been robust, with a 13.87% increase in 2024 compared to the previous year. Analysts expect Alphabet's revenue growth to continue, with an average revenue growth forecast of 11.52% for the next five years. This expected revenue growth is higher than the expected revenue growth rate for the S&P 500 index during the same period.

Alphabet's strong earnings and revenue growth are driven by several key factors, which appear to be sustainable:

1. Advertising Revenue: Alphabet's core advertising business, which includes Google Ads and YouTube ads, is the primary driver of revenue. The company's ability to innovate and maintain market share in digital advertising has led to consistent growth.
2. Cloud Services: Google Cloud Platform (GCP) has emerged as a significant revenue driver, with growth rates outpacing the broader cloud market. As more businesses adopt cloud services, Alphabet's cloud offerings are well-positioned to capture market share.
3. Hardware and Other Revenue: Alphabet's hardware segment, which includes products like Pixel phones and Nest devices, has seen steady growth. Additionally, other revenue streams, such as Google Play and YouTube subscription revenue, have contributed to overall earnings growth.
4. Operational Efficiency: Alphabet has consistently improved its operational efficiency, as evidenced by its growing operating margins. This improvement in operational efficiency has contributed to earnings growth.

In conclusion, Alphabet stock appears undervalued compared to the S&P 500 index based on several valuation metrics. The company's strong earnings and revenue growth, driven by advertising revenue, cloud services, hardware sales, and operational efficiency, are expected to continue in the coming years. Investors should consider adding Alphabet stock to their portfolios, as the company's fundamentals and growth prospects suggest it is a compelling investment opportunity.