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If you've been paying attention to the markets in the past few years, then you know just how much some of the most dominant technology companies' shares have climbed. Investors looking to put money to work might be discouraged by all the bullish fever.
However, there's a cheap stock that you've undoubtedly heard of that deserves some attention. Is it a no-brainer buying opportunity in 2025?
Why the discount?
In the past five years, Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) stock has climbed 169% higher. That's a better gain than the tech-heavy Nasdaq-100 index. But even after such a fantastic return, as well as a market cap of $2.4 trillion, the internet giant looks like a worthy investment candidate.
Shares trade at a forward price-to-earnings (P/E) ratio of 21.6, which is much cheaper than they were three years ago. The Nasdaq-100 index, on the other hand, carries a forward P/E ratio of 25.1.
It makes zero sense why one of the world's most successful enterprises sells at a discounted valuation. This setup would be understandable if Alphabet's growth were going to fall off a cliff. But this doesn't appear to be the case.
According to Wall Street consensus analyst estimates, the company's revenue and earnings per share are projected to rise at compound annual rates of 11.2% and 13.2%, respectively, between 2024 and 2026. And given that both those figures increased at a brisk pace historically, it's not unreasonable to assume those double-digit growth prospects can continue throughout the back half of this decade.
Network effects
Alphabet isn't a dominant business for no reason. It possesses sustainable competitive advantages that protect it from the constant threat of disruption in an ever-changing tech landscape.
The company has perhaps one of the widest economic moats around. A key component of this is the presence of network effects. This is prevalent in Google Search, the crown jewel segment.
The amount of information out there seems to be rising at an exponential pace. Google Search's ability to organize this and make it accessible to consumers across the globe provides immense value. And over time, the company's ability to improve its algorithms makes the experience better for internet surfers. This creates a positive feedback loop.
Network effects also underpin YouTube's moat. As more content creators post more videos, it draws in a wider audience that spends more time viewing. This in turn incentivizes content creators to do even more. Both Google Search and YouTube essentially become more valuable as more people use them, which makes it very difficult for anyone to displace them.