Should You Buy Alphabet Stock Down 10% From Its All-Time Highs?

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) has been a top stock to own over the past year. Despite its size, it's up an incredible 107%. After a fantastic one-year gain like that, investors should take a step back and see if those gains were warranted or if the stock is getting a bit too pricey.

With the stock about 10% down from its all-time high, it has given up some of those gains, but it's still within striking distance of a new all-time high with a solid week or two of gains. So, is Alphabet stock a buy right now?

Image source: Getty Images.

Alphabet is firing on all cylinders

When you look at how Alphabet is doing as a business, it's hard not to like. Its legacy Google Search business is doing fantastic, with revenue rising 19% year over year in the first quarter. The continued success of this business unit is vital for Alphabet's future, as it generates a ton of cash that can be invested in other areas, like artificial intelligence (AI).

Alphabet has emerged as a top option in the generative AI realm with its leading Gemini model. However, it's not putting all of its eggs in one basket, either. Alphabet is investing hundreds of billions of dollars into its cloud computing platform to run its AI workloads, as well as some of its competitors. Google Cloud's revenue soared 63% based on strong cloud demand, but also because it's starting to sell some of its custom AI chips, known as Tensor Processing Units (TPUs), to external clients. The combination led to this division's operating margin expanding from 18% last year to 33% this year, a huge improvement.

Overall, Alphabet's revenue rose 22% in Q1, with operating income rising 30%. Those are solid results for any company, but you'll have to pay up to own the stock. I think the best way to value a stock like Alphabet is by using cash from operations (CFO), which measures how much cash a business generates without any capital expenditures or other one-time items like gains on investments. From this perspective, Alphabet is more expensive than it's been over the past decade.

GOOG Price to CFO Per Share (TTM) data by YCharts

That raises red flags, but it's also not out of line. Over the past five years, Alphabet's peers, like Microsoft and Apple, have traded for an average price-to-CFO ratio of 25.7 and 26.7, respectively. So, Alphabet isn't necessarily expensive from a big tech stock standpoint, but it also isn't cheap.

I continue to think Alphabet is a strong stock pick over the next decade, but a higher-than-normal valuation currently eats up some of its upside.

Keithen Drury has positions in Alphabet and Microsoft. The Motley Fool has positions in and recommends Alphabet, Apple, and Microsoft. The Motley Fool has a disclosure policy.