Source: PaxForex Premium Analytics Portal, Fundamental Insight
Alphabet's stock has fallen 40% from its all-time high, with the latest drop driven by fears of artificial intelligence.
It is fair to say that fears of disruption are not unfounded, given how rapidly artificial intelligence is evolving. But what may be overlooked is how strong a business Google is currently in. And this could be an opportunity to buy an amazing business for an entire generation.
Before moving to the best part, the fact is that Alphabet's biggest earnings are actually down by the end of 2022. In Q4, search revenue fell 1.6% to $42.6 billion, YouTube revenue fell 7.8% to $8.0 billion, and Google Network dropped 8.9% to $8.5 billion. Some of this decline can be explained by the fact that companies spend less on advertising, but we also cannot forget about the consequence of Apple's app tracking transparency (ATT).
As for the good news, Google Cloud's revenue rose to $7.3 billion from $5.5 billion a year ago. This made up for losses in the ad-supporting business, but there is now a fundamental weakness in advertising.
So is the decline in the advertising business a problem for Alphabet? It depends on how you view the competition.
We've heard a lot in the last few weeks about looming competition from ChatGPT, Microsoft's AI-enabled Bing, and other AI tools. Alphabet was so scared that it introduced a product called Bard, which was definitely not ready for prime time.
While these products are potential competitors, let's not rush into calling Alphabet's business a dying one just yet. Google is still the default search engine on the vast majority of today's smartphones and browsers, and it's ingrained in the way many of us work. In addition, advertisers know how to use Google's tools and get a return on their investment. It's not clear (yet) how AI models will be monetized by advertisers in this way.
It's difficult to exaggerate how good Alphabet's business prospects are around its core search product. The company owns Android, where it can make Google the default search engine and Google Maps the default map. YouTube is probably the most valuable business in streaming today. Let's keep in mind Gmail, Chrome, and the Google Play Store, which are fortresses around the core search business.
It's easy to say that Google is weaker now than at any time in the past decade, given the threat from artificial intelligence, and that's probably true. But any disruptive forces that come to the aid of Google and Alphabet will have to overcome the company's moats and get ahead of any response that Google may already have waiting in the wings. It's a daunting task for any company.
The market's fear that Google will be forced out presents us with a unique opportunity to buy Alphabet. The company is trading at just 19.6 times free cash flow, and that's without the $114 billion in cash on its balance sheet.
Alphabet stock is the best buy imaginable in a long time. There's no doubt that the current downturn in advertising is a short-term episode, and the company will return to growth (albeit slower than in the past) in the next few years.
As long as the price is above 88.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 93.53
- Take Profit 1: 97.00
- Take Profit 2: 102.00
Alternative scenario:
If the level of 88.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 88.00
- Take Profit 1: 85.00
- Take Profit 2: 83.00
