The stock market cares more future earnings potential than the past -- and that may be why Nvidia, Microsoft, Apple (NASDAQ: AAPL), and Amazon (NASDAQ: AMZN) are all worth more than Alphabet (GOOG -0.
18%) (GOOGL -0. 20%) today even though Alphabet is the only S&P 500 stock with over $100 billion in trailing-12-month net income.
Here's why the market views Alphabet's earnings differently than other megacap growth stocks, and whether Alphabet is a buy now. Image source: Getty Images.
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 Alphabet had a 30 P/E ratio instead of a sub-20 P/E, it would be worth well over $3 trillion.
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 recommends the ing options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.