At the end of the day, earnings will drive stock prices. A company is worth the cumulative profits it generates for shareholders, discounted back to today. As investors, we want to buy a piece of these earnings -- what you are doing when buying a stock -- as cheaply as possible. One way to measure the cheapness of a stock is to look at its forward price-to-earnings ratio (P/E), which takes the current market cap and divides it by Wall Street estimates for earnings over the next 12 months. The lower the number, the better.

Today, Alphabet (GOOGL 2.63%) (GOOG 2.43%) is trading at one of its lowest forward P/E ratios ever. In fact, Alphabet has the lowest forward P/E ratio of any Magnificent Seven stock. Does that mean you should buy the stock for your portfolio today? Let's analyze Alphabet's business in the age of artificial intelligence (AI).

Discounted forward earnings

Alphabet is the parent company of Google, YouTube, Google Cloud, DeepMind, Waymo, and other technology subsidiaries. Mainly, its profits come from Google Search and related properties.

Historically, Alphabet would get a premium P/E ratio due to the fast growth of Google Search. The minimum trailing P/E ratio -- which takes the current market cap and divides it by trailing earnings -- hit 16.6 in the last 10 years, but was usually well above this level. Today, Alphabet's forward P/E ratio is right around 18, meaning that Alphabet stock is at one of its most discounted levels ever.

All else equal, investors want to buy a stock at the lowest P/E ratio possible. That way, you are buying the stock at the cheapest price possible. You can get a higher dividend payout (Alphabet's dividend yield is currently 0.5%) and more bang for your buck when the company repurchases stock. Alphabet repurchased $62 billion worth of stock in 2024. At that rate of repurchases, it can reduce its shares outstanding by 3.4% a year, which will directly affect earnings per share (EPS) growth.

But why is Alphabet stock so discounted? It comes down to risks from both AI and monopoly lawsuits.

OpenAI growth and monopoly lawsuit

A consumer AI renaissance is upon us. Start-ups across the board are getting billions of dollars in funding to make conversational AI tools useful for everyone around the world. None are more popular than OpenAI's ChatGPT, which has an estimated 400 million active users and a goal to hit 1 billion users by the end of 2025.

OpenAI growth scared investors away from Alphabet, as it looks like the cash cow in Google Search has been disrupted. That could be true, but Alphabet is not taking these competitive threats lying down. It has embedded AI features into Google Search, allows users to search pictures with Google Lens, and is operating its own conversational AI bot called Gemini.

Gemini's advanced tools and the popular NotebookLM product are now a part of the Google One subscription, which gives you a bundle of Google Services for $20 a month. Using its economies of scale, I believe that Alphabet has the power to push back against OpenAI and win the consumer AI race.

Another risk to Alphabet's business is the monopoly lawsuits it is facing. A federal court judge ruled that the company's advertising exchange business is an illegal monopoly, meaning the business is likely to be broken up. While this is not good for Alphabet, the online ad exchange is only a sliver of its overall revenue today.

More important is Google Search, which is in the middle of its own antitrust case. Today, it's unclear what the result of this second antitrust case will be, but there are rumors it could be forced to sell the Google Chrome browser or stop its hardware exclusive deals with phone makers like Apple.

A monopoly antitrust case is a risk to Alphabet's business, but it may not be all sour for the technology giant. It's currently facing new competition from the likes of OpenAI that makes this case increasingly moot, with TikTok and Instagram also serving as new use cases for young people to search. Plus, a ruling that stops Alphabet's payments to hardware makers may actually help the company increase earnings. Bloomberg reported that Alphabet paid Apple $20 billion in 2022 to make Google Search the default on Safari. Take that away, and Alphabet's expenses drop by $20 billion annually, albeit with added risk that search engine competitors could take share on Apple devices.

AMZN PE Ratio (Forward) data by YCharts.

Why Alphabet stock is a buy today

All the noise around AI competition and monopoly lawsuits has investors scared of buying Alphabet stock. There's also the potential effect of tariffs on its business in 2025. That presents a buying opportunity for investors with a longer-term time horizon.

Alphabet has a phenomenal track record of innovation in consumer technology, and billions of people use its services every day around the globe. It was traditionally a monopoly in Google Search. Now, the industry may end up being a duopoly with the rise of the new AI tools like ChatGPT. This is not the end of the world for a growing sector with hundreds of billions in consumer and advertising spending each year (including both traditional search and AI).

Last quarter, Alphabet's overall revenue grew 12% year over year to $96.5 billion. Operating income grew 31% year over year due to strong operating margin expansion. If this fast earnings growth continues, Alphabet's P/E ratio will fall quickly from this already low starting point. This makes the stock a fantastic buying opportunity today for investors with an eye on the future.