Why Alphabet Isn't as Cheap as It Looks
Investors often rely on earnings multiples to gauge a stock's valuation. Comparing price-to-earnings (P/E) multiples is a good way to see how expensive one stock is relative to another. But that can sometimes lead you on a dangerous path, especially if a company had a strong profit in the past year that was inflated due to a one-time gain. And on the flip side, one bad quarter could deflate the bottom line and make a stock's valuation look incredibly expensive. These are some of the things investors need to take into account when looking at earnings multiples.
Tech giant Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) looks cheap right now based on its P/E ratio, but that can be a little misleading. Although its valuation has taken a beating, the stock still isn't a bargain buy.
Shares of Alphabet are down 31% year to date, and the stock looks like it could potentially be a bargain buy. Trading at 18 times its trailing earnings, and even on a forward basis, its P/E multiple looks incredibly cheap at 16. The S&P 500 averages nearly identical multiples. But for a top tech stock like Alphabet that possesses some attractive assets, including YouTube and Google's search engine, and that has more than doubled its profits over the past two years, it would stand to reason that investors would pay a premium for its business. Alphabet has historically traded at more than 30 times its profits, and its current valuation does suggest it is heavily undervalued:
Source Fool.com
