Gains on Investments Skew Alphabet and Amazon's P/E Ratios

Alphabet and Amazon's stocks appear to be undervalued compared to the S&P 500, but is this really the case? The two tech giants trade at price-to-earnings ratios of 17 and 20.9 respectively, while the broader market trades at 24.2 times earnings.

However, a closer look reveals that these numbers are skewed by one-time effects from gains on investments. Both Alphabet and Amazon have significant investment portfolios, with holdings in companies like Anthropic, an AI firm valued at $965 billion after its latest funding round.

Under generally accepted accounting practices (GAAP), these gains must be reported as increases in earnings, artificially inflating the EPS metric and making the stocks appear cheaper than they really are.

But when looking beyond these one-time effects, both Amazon and Alphabet still appear to be solid deals. Their forward P/E ratios based on next year's earnings projections are 25 and 23 respectively, which is relatively reasonable considering their growth rates and leading roles in the AI arms race.