Is Alphabet Stock Cheap?

But as prices dropped throughout 2022, opportunities also opened up for investors to purchase companies that would have been too costly at their previously over-inflated level.

 

Indeed, one such enterprise currently trading at a significant discount is Alphabet Inc. In fact, the parent company of YouTube, Google and Waymo is sporting some of its most attractive valuation metrics in years.

 

For example, GOOGL’s current price-to-sales ratio of 4.3x was only ever this low back in 2008, and its price has managed to increase 10-fold since that time.

 

But will Alphabet’s stock rise again by the same magnitude in the future? Or is this once-mighty company now in permanent decline?

 

Alphabet recently disclosed its third-quarter 2022 earnings report, and the results were less than spectacular. The company announced its first-ever decline in YouTube ad revenue – which fell 1.86% to $7.07 billion – while its Cloud segment continued to be a loss-making endeavor.

 

That said, there were definitely some tough comparisons between now and last year when GOOGL was still benefiting from its pandemic-related sales growth, but that doesn’t explain the entire story.

 

For instance, Philipp Schindler, Alphabet’s SVP and Chief Business Officer, noted that the business had experienced a pullback in ad spending in the second quarter, with those trends continuing to bleed through into the third.

However, what should be particularly worrying for Google is that Amazon’s ad business is doing so well at a time when Alphabet’s is starting to deteriorate. Indeed, AMZN has recently seen its advertising sales expand 25%, bringing in $9.55 billion compared to Wall Street’s expected $9.48 billion.

 

And while Alphabet can point to the fact that an uncertain economic climate is weighing down on its ability to generate ad revenue, that doesn’t seem to be an issue for Amazon so far. Furthermore, AMZN isn’t typically considered a natural rival to Google’s advertising empire, although that looks likely to change.

 

But it’s not just Alphabet’s top line that the company needs to concentrate on. More importantly, perhaps, are the firm’s profit metrics – which also took a hit this quarter too.

 

For example, GOOGL’s operating income decreased year-on-year, dropping 18.55% from $21.0 billion to $17.1 billion. Its operating margin also fell from 32% to 25%.

 

With slowing growth and a raft of new competition in the advertising space, GOOGL will no doubt face a slew of headwinds fairly soon. Yet there are still several reasons to be optimistic about Alphabet, as we’ll discover in the next section.

 

As far as advertising revenue goes, Google Search is Alphabet’s most important product. Sales of $39.5 billion in the last quarter were larger than its YouTube and Google Network ads combined, and it remains the principal money-generator for the company at present.

 

Indeed, one of the things that makes Alphabet’s search business so lucrative is its use of artificial intelligence (AI). In fact, the firm is making great strides in natural language processing, which is helping deliver better answers to queries of a more complex and nuanced nature.

However, it isn’t only in the Search domain that this can be useful. Google is now transferring its AI and machine learning (ML) models over to YouTube in a bid to solve a number of challenges on the company’s flagship platform.

 

And this is a big deal. According to work undertaken by the market research firm Nielsen, YouTube captured a massive 7.6% of all streaming watch time in August 2022. Its audience is huge, and any improvements in how it distributes its ads will significantly impact the company’s bottom line over time.

 

Moreover, trends in how consumers watch TV are also changing. Alphabet recognizes this as another opportunity to better target its ads to viewers, and is working to help brands take advantage of this. Writing on googblogs earlier this year, Product Management Director Nicky Rettke said that ML algorithms are now enabling ads on YouTube to be resized “into square or vertical” formats, depending on how the video content is being watched.

 

Crucially, GOOGL is also able to sell its expertise to other companies as enterprise-grade services and solutions. Vodafone, for instance, is utilizing Vertex AI’s predictive capabilities to improve its network performance and enhance its customer experience.

 

Purchasing Alphabet stock is never going to be a case of catching the proverbial “falling knife.” The company remains one of the most important businesses in the world, and its contribution to society over the years is almost without parallel.

 

That said, GOOGL hasn’t been performing to its own high standards of late. Its total revenue for the last quarter only increased 6% – a paltry sum compared to the 41% it clocked in 2021.

 

But the firm is the exemplar of a cutting-edge technology venture, and its advances in AI and ML will become indispensable to an increasingly digitally dominated economy.

 

The long-term appeal of the stock should not be diminished in investors’ minds, and Alphabet’s low valuation multiples should attest to its ability to spring to new heights from here. At the same time, the business has enough growth drivers from its core operations to see it continuing at the pace it has been doing before this latest underwhelming quarter.

 

However, anyone buying GOOGL stock today must reckon with the fact that economic conditions do not favor a quick recovery. Falling ad revenue suggests that companies and brands using its platforms are already cutting back on their marketing spend, which should be seen as a major red flag for Google.

 

Yet, for those with patience and willingness to suffer in the short term, GOOGL may never be this cheap again.