Alphabet stands out as a rare megacap bargain

(Bloomberg) — Big tech and internet stocks have regained investor favor this year, and no company is ticking more boxes for bulls than Alphabet Inc.

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The Google-owned company not only offers the strong cash flow and growth characteristics that investors are looking for amid rising economic uncertainty, but is also the only one of the top five tech companies by market value to be valued at a discount to the Nasdaq 100 index.

Though Alphabet’s shares lost ground this week as easing concerns about the banking system cooled high demand for megacaps, they are up 13% in March, nearly double the tech-heavy benchmark. The rally added more than $140 billion to Alphabet’s market value and put the stock on track for its biggest monthly gain in nearly two years.

“Of the megacaps, Alphabet is the only one with growth above 10%, a tangible valuation, and the possibility of multiple expansions,” said David Wagner, a portfolio manager at Aptus Capital Advisors, which has reduced its exposure to big tech but is staying with Alphabet optimistic.

The stock trades at about 17 times forward earnings over the next 12 months, compared to 24 times the Nasdaq 100 and Alphabet’s past decade average of 20. The valuation makes it a relative bargain under the technology heavyweights. Apple Inc., Microsoft Corp. and Nvidia Corp. are all trading at premiums to historical averages and the Nasdaq 100. While Inc. compares favorably to its long-term average, its multiple of around 35 dwarfs that of the benchmark.

Alphabet shares plunged 39% last year as digital advertising spending fell and tech stocks sold off sharply as the Federal Reserve aggressively hiked interest rates to fight inflation. In recent months, however, analysts have been raising revenue estimates for 2023, and growth is now expected to rebound to 18% from 10% in 2022.

Artificial intelligence

“With Alphabet, not only do you get the growth of the business, you also have the potential for some valuation enhancement as more clarity is gained on long-term issues like antitrust cases,” said Patrick Burton, portfolio manager at Winslow Capital Management.

One theme that’s been dogged by Alphabet this year is its standing in the AI ​​race, which has sparked tremendous investor interest. Concerns over the competence of Bard, Alphabet’s ChatGPT rival, caused the stock to fall in February amid fears that its market share in the lucrative search engine advertising business was at risk.

Google recently granted Bard access, and both Bloomberg Intelligence and analysts at Bank of America Corp. wrote that the launch may help allay concerns about Microsoft’s perceived lead in using ChatGPT technology.

“The AI ​​story is just beginning, and with Alphabet trading at a discount, it’s harder to say Microsoft or Apple have the same upside potential,” said Burton of Winslow Capital.

Tech chart of the day

The Nasdaq 100 index entered a bull market on Wednesday, up 1.9%, giving the tech-heavy index a little more than 20% from its closing low in December. Big Tech has been a major contributor to the Index’s rise, with major components Nvidia, Meta Platforms Inc. and Tesla Inc. being the biggest percentage gainers of 2023. As a measure of how top-heavy the rally has been, an equally weighted version of the index is up just 13% over the same period.

Top Tech Stories

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  • microsoft corp sells advertising in responses from its Bing chat search engine, highlighting a potential revenue model for an artificial intelligence tool that the company says has attracted an average of 100 million daily users.

  • A prominent technology ethics group plans to file a complaint with the US Federal Trade Commission, urging the regulator to halt further commercial deployment of new generations of artificial intelligence technology powering the popular OpenAI Inc. tool ChatGPT.

  • The Sony Group Corp. is expected to sell fewer than 300,000 PlayStation VR2 headsets in its first few weeks on the market, a slow start for the company’s efforts to take a leading role in the development of the metaverse.

  • South Korea’s parliament on Thursday easily passed a bill to boost the country’s powerful semiconductor industry by giving companies tax breaks to boost investment.

  • Netflix Inc. is working to bring its nascent video game service to televisions for the first time, and is moving beyond smartphones and tablets in a sign of its growing ambitions.

  • Nick Clegg, head of global affairs at Meta Platforms Inc., took to the Metaverse on Wednesday to insist that the future of computing will take place in this as-yet-undefined virtual world.

– With the support of Subrat Patnaik.

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