Low P/E Ratio Difficult to Eliminate AI Anxiety Alphabet Inc. Class C (GOOGL.US) in Valuation Dilemma

Even though the price-to-earnings ratio has dropped to a two-year low and the impact of tariffs is limited, the market's continued concerns about Alphabet Inc. Class C (GOOGL.US) lagging position in the field of artificial intelligence (AI) continue to put pressure on its stock price this year. As a recognized leader in AI, Alphabet Inc. Class C has always struggled to shake off the shadow of potential market share erosion by competitors like ChatGPT. Although it still dominates the search engine market, any loss of market share could exacerbate pressure on its stock price - especially against the backdrop of the company's continued heavy investment in AI. "When market share is too high, the only way to go is down," said Kevin Walkush, portfolio manager at Jensen Investment Management. "While we believe its dominance in search will not waver, the market has clearly exaggerated these concerns, but this survival narrative does indeed influence investor sentiment." Even as President Trump's suspension of tariff policies sparked a rebound in the market on Wednesday, Alphabet Inc. Class C rose by 9.7%, but its year-to-date decline still stands at 16%, underperforming AI concept stocks like Microsoft Corporation (MSFT.US), Meta (META.US), and the Nasdaq 100 index. To maintain the upward trend in stock prices, it is crucial to restore investor confidence in the search business. At the same time, the high cost of building AI models highlights the importance of return on investment. The company announced in February that its capital expenditure for 2025 will reach $75 billion, far exceeding market expectations, and it reaffirmed this plan on Wednesday. The latest data from Statista shows that Alphabet Inc. Class C's global search engine market share has fallen from 92.9% in January 2023 when ChatGPT emerged to 89.6%. Melius Research analyst Ben Reitzes believes that this moderate decline could foreshadow a larger crisis. "The search business is about to face a comprehensive attack, but the market's expectations have not fully reflected this," he warned in his report. "With accumulating data, Alphabet Inc. Class C's valuation multiples may continue to be under pressure." He specifically pointed out the risk that young users are accelerating their move to services like ChatGPT. Although search advertising revenue slightly exceeded expectations last quarter, weak performance in the cloud business (another core AI segment) triggered a sell-off in the stock. Data shows that search advertising is expected to contribute over 56% of total revenue for Alphabet Inc. Class C this year, with the cloud accounting for approximately 14%. Nevertheless, the company still has positive factors: revenue growth is expected to be around 16% this year, net profit will continue to grow in double digits by 2027, and revenue expectations for 2025 have been raised over the past month. Compared to hardware companies like Apple Inc. (AAPL.US), Alphabet Inc. Class C's primarily advertising-based business model is less affected by tariffs. Currently, its valuation has fallen below the S&P 500 average level, with a dynamic price-to-earnings ratio of less than 17 times, making it the cheapest among the "Seven Giants." "This highlights significant investment value," emphasized Walkush. "If the market can correctly recognize the sustainability of its growth and cash flow, the valuation should be higher." Overall, Wall Street remains positive. About 80% of analysts have a "buy" rating on the stock, with the current stock price having 34% upside potential to the target price. In addition to Alphabet Inc. Class C's search business, several of the company's businesses are also considered undervalued. Needham estimates that YouTube alone could be valued at $666 billion, while DA Davidson believes that the value of DeepMind and its TPU chip business could reach $700 billion. Its AI pharmaceutical division recently raised $600 million, and Waymo's autonomous driving valuation exceeds $45 billion. In the field of AI search, Alphabet Inc. Class C still needs to prove itself with strength, said Divyaunsh Divatia, research analyst at Janus Henderson Investors. But it has all the assets necessary for success, and we expect the search business to grow overall, so even if it holds a smaller share in a larger market, Alphabet Inc. Class C will still develop well. The widespread adoption of AI products like Gemini is important, but consider everything you get from this stock: not only growing search and cloud businesses, but also the world's largest media company YouTube and the limitless potential of Waymo - to acquire these assets at a valuation below the market is a truly value investment.