Alphabet trades at 17 times trailing earnings and Amazon at 20.9 times—both below the S&P 500's 24.2 multiple. But that discount is an illusion.
Under GAAP accounting, unrealized gains on investments flow directly into earnings per share, even when stakes remain unsold. Anthropic's latest funding round valued the A.I. firm at $965 billion; reports suggest the company is targeting a $2 trillion valuation in a future IPO. Both Alphabet and Amazon hold meaningful stakes in Anthropic and have booked substantial gains on pa. Alphabet also recorded significant unrealized gains on its SpaceX investment in Q2, contributing to $98 billion in other income that quarter alone. These paper gains artificially depress trailing P/E ratios by inflating the earnings denominator.
Forward P/E multiples tell a different story. Amazon trades at 25 times next year's projected earnings; Alphabet at 23 times. These are premium valuations—and they should be. Both companies dominate cloud infrastructure, control massive advertising platforms, and are deploying tens of billions annually into A.I. compute capacity. In a category where capital intensity and scale determine winners, their moats widen with each deployment.
Investors should ignore the trailing P/E mirage and price these stocks on forward fundamentals. The apparent discount relative to the broader market does not exist.
