Investment Opportunities Amid Stock Market Volatility

The recent stock market sell-off has led to declines in almost all stocks from their previous all-time highs. Notably, some stocks had already been struggling before this broader sell-off, making them appear exceptionally cheap today.

This situation presents a significant buying opportunity for long-term investors, as it is rare to find shares at such low prices. Three stocks currently standing out as notable bargains are Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), Taiwan Semiconductor (NYSE: TSM), and Adobe (NASDAQ: ADBE). Each company has seen a significant decrease from its highs, yet there is no clear justification for their current low valuations.

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The S&P 500: Our Benchmark for Valuation

To assess what constitutes “cheap,” I’m using each stock‘s forward price-to-earnings (P/E) ratio. This metric relies on analysts’ future earnings projections, providing a forward-looking view rather than just a historical perspective. The market anticipates future conditions, making forward P/E a more relevant valuation tool.

The S&P 500 currently has a forward P/E ratio of 20.2, serving as a baseline for comparison. Stocks trading at a lower P/E than this can be considered bargains since they are priced below a broad index. Notably, this is a conservative approach, as these tech giants would typically be compared against the Nasdaq-100, which has a forward P/E of 24. Using the S&P 500 allows investors to feel greater confidence that these stocks are indeed undervalued.

Company Analysis: Alphabet

Currently, Alphabet trades at 17.5 times its forward earnings.

GOOGL PE Ratio (Forward) data by YCharts.

Alphabet has historically traded at a discount relative to its peers, mainly due to its reliance on advertising revenue. This revenue source is cyclical and can decline prior to a recession or economic slowdown, often being the first area where companies cut costs.

This dependence on advertising revenue partially explains Alphabet’s current low valuation. Even if we consider Alphabet’s trailing P/E ratio, today’s price is significantly lower historically.

GOOGL PE Ratio data by YCharts.

We’re nearing the lowest valuation levels we’ve observed in the last decade, which was seen in early 2023 as the market braced for a potential recession. Investor sentiment currently mirrors this caution as the economic implications of tariffs come into view.

Additionally, Alphabet faces challenges from two recent court rulings against it. A U.S. district judge ruled that Google’s digital ad network constitutes an illegal monopoly, following a similar ruling regarding its search engine. This issue is far from settled, as Alphabet plans to appeal, and any potential remedies will take time to unfold. Amid this uncertainty, Alphabet remains a robust business to consider for investors.

Despite the potential challenges ahead, Alphabet retains a strong position in the digital advertising ecosystem, bolstered by the popularity of its Google products. Even if the company breaks apart due to legal issues, the individual components will likely retain significant value, potentially enhancing shareholder return. Hence, I maintain that Alphabet is a worthy investment at this time.

Company Analysis: Adobe

Adobe once ranked among the most highly valued tech firms, but its market position has shifted. Concerns exist surrounding the impact of new generative AI platforms on its market share; however, these impacts have not yet materialized. In response, Adobe has developed its own generative AI solutions and shown steady growth of about 10%, indicating resilience.

Nevertheless, Adobe has lost the premium valuation it held over the past decade.

ADBE PE Ratio data by YCharts.

Adobe’s trailing P/E ratio is at its lowest in a decade, and its forward P/E also trails behind market averages. This suggests a transformation from a growth-oriented valuation to one focused on value; acquiring shares during this transition could be advantageous for long-term investors.

Company Analysis: Taiwan Semiconductor

Lastly, Taiwan Semiconductor (TSMC) plays a crucial role as a chip manufacturer for leading technology firms. Investors fear how TSMC’s business might react to tariffs, though no current tariffs exist on semiconductors, and any changes in policy remain uncertain. Nevertheless, TSMC is making significant investments, allocating $100 billion to expand its manufacturing capabilities in the U.S., aiming to strengthen its relationship with U.S. government interests.

Despite these developments, TSMC’s stock trades at a notable discount relative to the broader market.