Alphabet is kicked out of the $4 trillion club after its record $505 billion drop. Here’s What History Says Could Come Next

Alphabet (GOOG -1.45%) (GOOGL -1.40%) made history for all the wrong reasons on Thursday. It lost a staggering $505 billion in market capitalization after falling 12.6% during the session.

This sale constitutes both the largest nominal loss in Alphabet’s history and its largest percentage decline in a single session.

Alphabet is now out of the $4 trillion club and has just been overtaken by Microsoft for the third most valuable company in the world behind Apple And Nvidia.

Here’s how Alphabet fared in past selloffs, why a historically powerful valuation metric no longer applies, and what could happen next for the communications services stock.

Image source: Alphabet.

Alphabet’s FCF yield fell to 0.6%

Buying Alphabet stock today is much riskier than in the past because much of its future earnings growth depends on whether its investments in artificial intelligence (AI) are profitable.

Alphabet is investing across the entire AI stack, from its in-house designed Tensor Processing Unit chips (designed by Broadcom) to its large Google DeepMind-based Gemini language models, Google Cloud infrastructure, and AI use cases across consumer and enterprise applications. This is a completely different business than the one that last experienced a sharp and prolonged downturn.

Let’s take a trip back to 2022, when the Nasdaq Composite (^IXIC -2.86%) fell 33.1% – the worst decline since the index fell 40.5% in 2008. At its worst point, on November 3, 2022, Alphabet closed at a split-adjusted $83.43 per share – marking a 44.3% decline from its all-time high. But the price-to-earnings ratio was only 16.6 – a very cheap valuation for a company of such quality. And more importantly, Alphabet’s free cash flow (FCF) yield was 5.6%.

In the same way that the dividend yield is simply the dividend per share divided by the stock price, the FCF yield is the FCF per share divided by the stock price. Like dividend yields, FCF yields increase when a stock’s price falls or FCF exceeds the growth rate of the stock price. A 5.6% FCF yield is incredibly strong, meaning that if Alphabet wanted to, it could theoretically support a 5.6% dividend on FCF alone. Or use that money to buy back stock, reinvest in the company, or bet big on its best ideas without hurting its balance sheet.

GOOGL data by YCharts

During this 2022 selloff, Alphabet’s FCF yield was at its lowest level in a decade. But as Alphabet began investing heavily in AI, its FCF stagnated and ultimately declined sharply. Alphabet’s falling FCF and rising share price dealt a major blow to its FCF yield. Given Alphabet’s cash burn rate, its FCF yield will likely turn negative in early 2027.

Alphabet is a buy for AI investors

Alphabet was once a magnificently boring company, with multiple high-margin segments and virtually endless runway for moderate but reliable growth. Alphabet’s stock repurchases have consistently exceeded its stock compensation, causing the number of shares outstanding to decline. And Alphabet has even started paying dividends in 2024, reflecting its capital-light business model.

In this framework, if Alphabet sold too much, the stock would simply become too cheap to ignore. Like pushing a volleyball underwater, the buoyant force propels the ball out of the water the second you release your grip, which is similar to how sellers can only push a great stock down for so long.

Today’s Alphabet is not a submerged volleyball waiting to take off. There is a lot more uncertainty. And therefore requires a higher risk appetite. That may appeal to growth investors, but Alphabet’s days as a high-margin value stock are on hold.

While Alphabet’s investments are expected to increase in 2027, it is difficult to value the company using traditional metrics such as price-to-FCF or price-to-earnings. Therefore, investors who don’t have high conviction in Alphabet, or who simply want to wait and see how AI spending pays off, may want to keep it on their watchlist for now.

At the same time, investors who believe in Alphabet’s ability to convert its long-term investments into future cash flow have an attractive opportunity to buy the stock at a much lower price.