Alphabet's Stock Just Did Something It Has Only Done 3 Other Times in History. Each Time the Stock Is at Least 47% Higher a Year Later.

Understanding a stock's historical trends is smart, especially if it's based in a cyclical industry like Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). Most of Alphabet's revenue comes from advertising, which can rise and fall alongside economic expectations. While the economic outlook is uncertain, there is more to Alphabet's rapid price decline this time.

Alphabet's stock now trades for around 17 times trailing earnings, a level it last reached only three times: 2008, 2012, and 2022. This is the company's fourth trip to a valuation level this low. However, each time it has reached these levels, the stock is much higher only a year later.

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Is this turnaround possible again in 2025? Or is there something else at play?

Image source: Getty Images.

Alphabet has always rallied from these low valuations

Although Alphabet's price-to-earnings (P/E) ratio of 17.8 is slightly off its all-time low of 16.1, which it hit just a few weeks ago before the market rallied this week, it's still historically low.

GOOGL PE Ratio data by YCharts

The economic outlook in 2008 and 2012 was grim, which is why the stock reached low levels. Additionally, at the start of 2022, everyone was convinced that the economy was headed for a recession, although that never surfaced.

Still, after touching those lows, Alphabet's stock performed phenomenally over the next year.

Data source: YCharts.

So, is Alphabet primed to post phenomenal gains over the next year?

Is this time different?

While Alphabet faces economic uncertainty, its business model is also under attack. The past three times Alphabet reached those lows, nobody questioned whether the Google search engine would be used in the next five years. This time, there are questions surrounding how it will fare against AI-powered search.

However, with the multiple that the markets have assigned Alphabet, it's assumed that the Google search engine is already extinct. Yet, Google Search revenue increased by 10% last quarter. Management attributes this rise to the popularity of its AI summaries feature, which uses generative AI to summarize the search results. This is the exact feature that some investors are worried about replacing Google search, so it seems odd that the market is dooming Alphabet's stock.

I believe the market is underestimating how stuck most people are in their ways. Many will opt to use Google's feature set for searches because it's what they've always done, rather than go straight to a generative AI platform. This may be a mistake over the long term, but we've seen Google's resilience over the past year and also its innovations to maintain its relevance.

So, while the circumstances surrounding Alphabet's drawdown are different this time, I believe the outcome will be the same. As Alphabet continues to post strong results throughout the year, the market will realize that the pessimism was unwarranted and that Alphabet deserves to have a normal valuation (in the low to mid-20s) as its big tech peers.

As a result, I think Alphabet is a strong buy because its stock should benefit from persistent double-digit growth and earnings multiple expansion.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Keithen Drury has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.