Alphabet (GOOG) (GOOGL) looks like a strong bargain right now, if you have the patience to hold it. There are many reasons to be scared right now if you’re an Alphabet shareholder, which is why the stock is so cheap.

But if you can maintain a long-term outlook (three to five years), you can realize that Alphabet’s stock is significantly undervalued right now and could be a fantastic value pick that makes a strong profit over that time frame.

Alphabet has a lot of negative headlines working against it
Alphabet is mainly an advertising company, as it handles ads on many of its platforms, including Google, YouTube, and Android. However, this got Alphabet into trouble recently.

In two separate cases, a U.S. district judge has ruled that Alphabet operates two forms of illegal monopolies: one in its web browser (Google Chrome) and another in its ad exchange. While this is troubling, it isn’t the end of the world for Alphabet shareholders.

There are still multiple courts that Alphabet can appeal through, and it’s highly likely that this case will end up at the Supreme Court in a few years. These appeals take time, so any breakup of Alphabet won’t occur for years. As a result, investors need to focus on what the business looks like now, as nobody knows what a broken-up Alphabet would look like or if it will even happen.

Even if you focus on the short term, there are fears about the strength of Alphabet’s ad business. Advertising budgets are notorious for being cyclical, and they often get reduced if companies believe there’s an economic downturn coming. Thanks to the effects of tariffs, many companies already are in this mindset, and it could affect Alphabet’s ad revenue.

So, with Alphabet’s short-term and long-term outlook looking rather cloudy, why am I even considering buying shares right now?

Alphabet’s stock has rarely been this cheap
Buying a stock solely because it’s cheap is never a good reason. There needs to be a functional business behind the company. Alphabet is such a dominant business that the U.S. government believes it needs to be broken up, and until that happens, it will continue to produce strong results even if the ad market is a bit dampened.

Despite this, the stock trades for valuation levels that have seldom been seen over the past decade.

At just 17 times forward earnings and 19 times trailing earnings, Alphabet’s stock is far cheaper than the S&P 500, which trades for 21.4 times trailing earnings and 19.8 times forward earnings. The market states that Alphabet is a below-average stock, but considering its dominance, this seems like an odd price tag for it.

Furthermore, Alphabet has a strong track record of repurchasing shares, and its cheap price means that share repurchases will be more effective. This could boost earnings-per-share (EPS) growth in the short term, allowing the stock to put up market-beating growth from an EPS standpoint, even if its revenue struggles to grow as ad budgets get reduced.

Alphabet is a much stronger business than the markets give it credit for; otherwise, the U.S. government (and governments worldwide) wouldn’t be calling for it to be broken up. Even if Alphabet gets broken up, these breakups tend to create value because investors receive further clarity into the business. So, regardless of what happens with Alphabet a few years down the road, the investment you make today has no chance of going to zero.

Although it’s a bit of a contrary pick for the current market state, I think Alphabet is still a strong stock pick for the next three to five years, and the price tag you’re paying today is dirt cheap compared to historical levels.

— Keithen Drury

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Source: The Motley Fool