It has not been a good year for Google and YouTube parent Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). The firm announced that net income fell 21% last year, while revenue growth slowed dramatically.
By the fourth quarter it was down to just 1% year-on-year. Alphabet stock has been marked down 29% over the past 12 months.
Lately though, it has been rising. In the first week of the year I could have bought shares at around $87 each, but now they are trading above $100 again. Could that be a sign the company’s outlook is brightening, meaning I ought to buy now?
Unique business
I think so. Alphabet has a range of businesses, but I still see Google as core to its long-term performance. And Google has been hit by a number of investor concerns.
A weak economy could lead advertisers to spend less, sending revenues and profits lower. Meanwhile, the rise of AI might mean internet users no longer proactively need to search for content, upending Google’s business completely. Another risk is the growth of search functionality on rival digital platforms, such as TikTok.
But maybe investors have been focusing too much on the threats faced by Google rather than the opportunities. TikTok’s success has coincided with new ideas at YouTube, such as short form content. So far, AI does not look advanced enough to pose a threat to Google. But seeing that Google is a serial innovator itself, it has as much chance of turning AI to its advantage than being damaged by it.
Alphabet has a unique business, with a huge customer base and range of tools to help keep them loyal. It is basically hardwired into the daily lives of vast numbers of people and businesses. Even if they were willing to make the effort to switch providers, in many cases there is no equally good alternative product available.
That business model leads to enormous profits. Despite net income slumping last year, Alphabet still earned over a billion dollars a week, on average.
I’ve been buying the stock
Although Alphabet stock has moved up lately, I still see the valuation as cheap for a company of this quality.
A market capitalisation of $1.3tn means the company is trading on a price-to-earnings ratio of 22. But I expect earnings will likely grow strongly over the next few years. Although last year was disappointing, Alphabet has proven its growth capabilities consistently and I think that it will be a profit machine in future too.
I have taken advantage of a lower Alphabet stock price to build a holding in the firm this year. To make sure my portfolio remains diversified, I do not plan to buy more shares in the tech giant at the moment.
But if I did not already own the stock and had spare cash to invest, I would be scooping up Alphabet like it was going out of fashion (which, to some extent, it has).
