Why Is Alphabet Stock Worth Less Than Nvidia, Microsoft, Apple, and Amazon Even Though It Is the Most Profitable S&P 500 Company?

Here's why the market views Alphabet's earnings differently than other megacap growth stocks, and whether Alphabet is a buy now

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More than just a number Earnings are one of the most important metrics investors use to value a company

How much fit a company generates is an integral part of an investment thesis

But so are expectations for future fits

GOOGL Net Income (TTM) data by YCharts Although net income is just a number, there are nuances worth understanding

A leading company that operates in a growing industry with competitive advantages, high fit margins, and a great balance sheet will have far higher-quality earnings than a company operating in a declining or even failing industry that is cyclical and capital-intensive

This concept is why even the best oil and gas companies, ExxonMobil and Chevron, sport such inexpensive valuations

Their earnings aren't high-margin

Generating them takes a lot of capital

And oil and gas consumption may look much different decades from now than today

This doesn't mean ExxonMobil and Chevron are bad companies

In fact, both are excellent dividend stocks

It just means investors are unly to pay the same price for these companies relative to their earnings as, say, an ultra-fast-growing company with high margins Nvidia

Alphabet doesn't have a capital-intensive model

It generates high margins and has diverse revenue s from its services Google, Google Network, YouTube, Android, Google Cloud, and more

It also has a phenomenal balance sheet with more cash, cash equivalents, and marketable securities than debt

Despite these advantages, Alphabet sports a price-to-earnings (P/E) ratio and forward P/E ratio that are far lower than Nvidia, Microsoft, Apple, and Amazon

NVDA PE Ratio data by YCharts Expectations drive valuations This discounted valuation is why Alphabet is worth less than its peers despite making more fit

Alphabet's valuation is much cheaper than some of its peers because investors are less optimistic its future earnings spects

Nvidia is powering the future of artificial intelligence (AI) with its graphics cessing units for data centers

Big continues to spend on AI, so investors are optimistic that demand for Nvidia's ducts will continue growing

Microsoft is integrating AI into its software and is the No. 2 player in cloud computing behind Amazon

In contrast, Alphabet's Google Cloud is a distant third in market

Apple isn't growing quickly, but the company has such a dominant, vertically integrated ecosystem of consumer ducts and services that investors are willing to pay a premium price for the stock relative to its earnings

Alphabet makes the majority of its operating income from Google

Un Amazon (and arguably Microsoft), cloud is not the most valuable aspect of the company

Alphabet's AI plays mainly come from Google Cloud and its "Other Bets" category, which consists of jects self-driving company Waymo and AI re lab DeepMind, which is behind the chatbot Gemini

In sum, the market may be viewing Alphabet's model as more vulnerable to nological advancements in AI than other megacap growth companies that are ly benefiting from AI

Alphabet is an impeccable value There's a famous (and still relevant) quote by Warren Buffett that goes, "You pay a very high price in the stock market for a cheery consensus. " Companies that are favorable to many investors tend to demand expensive valuations, whereas companies with an element of uncertainty can fetch a discount

The simplest reason to buy Alphabet right now is if you believe the market's skepticism the company's AI potential is unwarranted or overblown

In that case, investors can buy Alphabet at a steep discount to its peers

If it had Microsoft's P/E, it would be the most valuable company in the world

In many ways, Alphabet deserves to trade at a discount to these other big names

But maybe only by a little bit -- not the drastic discrepancy we are seeing in the market today

All told, now is a great time for value investors interested in big to buy Alphabet stock

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors

Daniel Foelber has positions in Nvidia

The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Chevron, Microsoft, and Nvidia

The Motley Fool has a disclosure policy.