Last week brought some relief for shareholders in Google owner Alphabet (NASDAQ:GOOG). The stock rose by 15% through Thursday and Friday, after US inflation readings came in lower than expected.
I don’t know if this will be a turning point for the share price of this tech giant. But I reckon this year’s US market slump may have created some buying opportunities.
I’ve been wondering whether I should take advantage of the bear market in US tech stocks to snap up Alphabet shares while they’re still under $100.
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Why I’d like to own Alphabet
There are lots of things I like about the owner of Google. This £1trn business is hugely profitable and has a long record of growth. Alphabet also owns many of the services I use every day, such as Android, Google Docs, YouTube, and Google Search.
Its leaders aren’t resting on their laurels either. They’ve consistently spent more than 10% of group revenue on research and development for many years. One of the group’s more recent bet is its cloud computing division, which is on track to generate well over $20bn of revenue this year.
Other ‘bets’ on the future include some interesting new businesses in areas such as self-driving cars, artificial intelligence, and health tech. I think that some of these could become big money-spinners over time.
Alphabet’s final big attraction for me is its fortress-like balance sheet. The company had a net cash balance of over $100bn at the end of September. Even in a deep recession, I don’t see any risk that this business will run into financial problems.
What should I be worried about?
All stock market investments carry some risk. My main concern here is that while Alphabet has had some success developing other business lines, it still makes all of its profits from online advertising.
Recent results suggest that ad profits may be moving back to more normal levels after the boost provided by the pandemic. Operating profit fell to $17bn during the three months to 30 September, compared to $21bn during the same period last year.
I don’t think Alphabet’s ad profits are going to disappear. But I think there’s a risk they could keep falling next year. If that happens, then the shares might not be as cheap as they seem.
What I’m doing
The latest broker views put Alphabet on a 2022 forecast price/earnings ratio of 20. I don’t think that’s too expensive for me to buy, given the company’s record of growth — profits have tripled since 2016.
However, third-quarter results were worse than expected. This prompted City analysts to cut their forecasts for the year ahead. My worry is that these weaker conditions could extend into next year. If that happens, I reckon this stock could have further to fall.
On balance, I think Alphabet looks reasonable value today as a long-term investment. But I also think there’s a good chance market conditions will get worse before they start to improve. For this reason, I’m not going to buy this fallen stock just yet.
