Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) and Amazon (NASDAQ: AMZN) look cheaper than the S&P 500(SNPINDEX: ^GSPC) at face value. Right now, Alphabet and Amazon trade for 17 and 20.9 times earnings, respectively. The S&P 500(SNPINDEX: ^GSPC) trades for 24.2 times earnings, making these two far cheaper than the broader market.
Considering that Alphabet and Amazon are two of the most popular big tech stocks available and both are growing at an incredible pace, this difference seems odd. So, what gives? Are these two actually screaming values begging to be bought, or is there something else going on here? Let’s take a look.
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Alphabet and Amazon each have one-time effects skewing their earnings
The price-to-earnings (P/E) ratio is the most popular tool investors use to value stocks, but it is far from perfect. Earnings per share (EPS) can be skewed in a variety of ways, and some of them are completely out of the company’s control. One way this happens is thanks to gains on investments.
Both Alphabet and Amazon have extensive investment portfolios, and each has seen their holdings dramatically rise in value this year. Both Amazon and Alphabet are major investors in Anthropic, the AI firm whose flagship model is Claude. Anthropic is expected to go public in the near future, with reports circling that it’s targeting a $2 trillion valuation. However, Amazon and Alphabet’s reported gains are based on Anthropic’s latest funding round, which saw the firm valued at $965 billion at the end of May.
Even though neither Amazon nor Alphabet sold their stake in Anthropic, generally accepted accounting practices (GAAP) require them to report the gain as an increase in earnings. This causes the EPS metric to rise without them selling, thus skewing Amazon and Alphabet’s P/E ratio.
Alphabet also had another investment produce a huge gain, as Space Exploration Technologies, better known as SpaceX, generated a massive gain for Alphabet during its second quarter. In fact, Alphabet produced $98 billion in “other income” during Q2, mostly from the gains it has on paper from Anthropic and SpaceX’s rise.
This explains why Alphabet and Amazon look so cheap, but are they actually cheap?
