Alphabet stock: short-term pain for long-term gains

Alphabet stock sank after yet another poor set of results. Despite 2023’s outlook not looking great, I’m buying for long-term gains.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Long-term vs short-term investing concept on a staircase

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

As in its previous three quarters, Google’s parent company posted another disappointing set of results. Consequently, the Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) stock price fell and may see further weakness this year. Nonetheless, I’m willing to weather the short-term headwinds for long-term gains.

$157.14
Movement
$4.32
(2.8%) Friday, 11 April 2025 at 21:00:00 British Summer Time

Coming up short

Alphabet’s Q4 numbers were nothing to celebrate about. Declines were prominent across the board with both top and bottom lines missing analysts’ estimates. Total revenue eked out a 1% gain due to some support from Google Cloud and Other revenues. Otherwise, the pullback in advertising was prominent, with YouTube Shorts continuing to cannibalise its long-form content.

MetricsConsensusQ4 2022Q4 2021Growth
Google Search revenue$43.30bn$42.60bn$43.30bn-2%
YouTube revenue$8.30bn$7.96bn$8.63bn-8%
Google Network revenue$8.90bn$8.48bn$9.31bn-9%
Google Cloud revenue$7.30bn$7.32bn$5.54bn32%
Other revenue$8.10bn$8.80bn$8.16bn8%
Total revenue$76.65bn$76.05bn$75.33bn1%
Diluted earnings per share (EPS)$1.21$1.05$1.53-31%
Data sources: Alphabet, Bloomberg

The short-term outlook for Alphabet stock isn’t bright either. Advertising and cloud spending are forecast to grow at a much slower pace this year. Numerous reports are suggesting that global ad spending will only grow by a meagre 4.5% compared to 7.6% last year, and double digits in the years prior. Additionally, Google continues to lose market share after years of dominance.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Digital Advertising Market Share.
Data source: Statista

A GAAP worth noting

Despite missing on both its top and bottom estimates though, I think the negative sentiment surrounding Alphabet stock is overdone. That’s because when zooming out of the headline figures, a clearer picture of the company’s overall performance can be seen. This is especially the case when comparing its GAAP and non-GAAP numbers.

There’s no shying away from the firm’s declining margins this term. However, it’s also important to note that the group reported a big loss in equity securities (-$1.49bn) this year versus a profit ($2.52bn) last year. These have no material impact on Alphabet’s underlying business model, and were losses realised from investments in stocks. Those losses account for approximately -$0.11 in EPS. Pair that with constant currency revenues and the tech giant actually reported EPS broadly in line with estimates.

Discounting the short-term noise, the conglomerate has a bright long-term future ahead. YouTube may continue to see weakness over the next couple of quarters. But the board’s ambitious plans for the platform to introduce e-commerce and turn it into a streaming service may see it come back stronger than ever. What’s more, Shorts has grown from 30bn to 50bn daily views over the past year.

And with fears surrounding ChatGPT potentially taking Google’s place as the world’s biggest search engine, Alphabet has hit back with its own chatbot in LaMDA. The language model is set to be released to the public this year with more details to be revealed this week.

Don’t bet against Alphabet

So, will I buy more Alphabet stock then? Well, its current and future valuation multiples are trading at multi-year lows. This could indicate a cheap buy, especially when taking its high upside potential into consideration.

MetricsValuation multiplesIndustry average
Price-to-earnings (P/E) ratio21.230.0
Forward price-to-earnings (FP/E) ratio20.433.3
Data source: Simply Wall St

Moreover, it has an impeccable set of financials. A large pile of cash reserves and robust free cash flow could see Alphabet instigating a further stock buyback programme to boost shareholder returns and more importantly, its EPS.

Alphabet Financials.
Data source: Simply Wall St

Therefore, it’s no surprise to see the likes of Morgan Stanley, Wells Fargo, Barclays, and many other brokers rating the shares a ‘buy’, with an average price target of $129. As such, I wouldn’t write Alphabet off so soon, and will be dollar cost averaging given the tremendous upside potential.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. John Choong has positions in Alphabet. The Motley Fool UK has recommended Alphabet and Barclays Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Growth Shares

Investing Articles

3 reasons Tesla stock may be a long-term bargain

This writer is keen to buy Tesla stock at the right price. He doesn't think it's there yet -- but…

Read more »

Investing Articles

Nvidia stock is a lot cheaper than before – or is it?

Nvidia stock has been caught in the whirlwind of market volatility. This writer has been waiting to buy, so might…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

A £10,000 investment in Rolls-Royce shares last week is now worth this…

Harvey Jones says Rolls-Royce shares couldn't escape the volatility of recent weeks, but wonders if the recent dip is a…

Read more »

Investing Articles

At what point would the Rolls-Royce share price become a bargain buy?

The Rolls-Royce share price was in pennies just a few years ago and has since grown enormously. Is it at…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Here’s the FTSE 100 stock UK investors have been buying and selling this week

In an unusually volatile week for share prices, one FTSE 100 company's been receiving more attention than most – both…

Read more »

Investing Articles

What should the Helium One share price be?

Our writer believes valuing pre-revenue mining stocks is incredibly difficult. To illustrate his point, he looks at the Helium One…

Read more »

Investing Articles

2 shares I just bought for my ISA during the stock market sell-off

As the market suffered its recent epic fall, this Fool snapped up two very different shares for his Stocks and…

Read more »

Investing Articles

1 FTSE 250 stock that analysts are calling a ‘Strong Buy’

The FTSE 250 can be overlooked by investors, but analysts believe this stock in particular could be undervalued by as…

Read more »