Source: PaxForex Premium Analytics Portal, Fundamental Insight
Undoubtedly, Alphabet stands out as one of the most exceptional businesses worldwide. This tech giant boasts exposure to numerous rapidly expanding sectors of the economy and consistently offers leading products and services that captivate customers.
Over the past three years, investing in Alphabet shares has proven to be a remarkable decision, with an impressive 66% increase, surpassing the broader Nasdaq Composite. Even in the first half of 2023, shares have witnessed a substantial 36% climb. Given these factors, is Alphabet stock a favorable investment at present? In our view, absolutely. Here's why:
First and foremost, Alphabet possesses a robust financial position that inspires confidence. As of March 31, the company held an astounding $115 billion in cash, cash equivalents, and marketable securities, offering exceptional financial flexibility to endure any prolonged economic downturns. Simultaneously, this financial strength empowers Alphabet to continue investing in new growth opportunities.
Moreover, Alphabet generates an abundant amount of free cash flow (FCF), with a remarkable $60 billion in 2022. The leadership team has not hesitated to employ this cash to repurchase its stock, having spent $59 billion on buybacks last year. During the first quarter of this year alone, buybacks totaled $14.6 billion.
Furthermore, Alphabet's businesses exhibit notable network effects, which further strengthen its position. Google Search, as the leading search engine with a staggering 93% global market share, stands as one of the most crucial internet platforms today. It caters to three distinct user bases: information-seeking consumers, publishers hosting their websites, and advertisers aiming to target specific audiences. All three groups derive increasing value from Google as the user base expands. As the platform grows larger, it becomes more valuable and beneficial.
YouTube also benefits from network effects. When more content creators choose to upload their videos on the platform, viewers are presented with a richer and more diverse content library. This leads to an enhanced viewing experience. Additionally, content creators gain the opportunity to reach an ever-expanding audience, amplifying their impact and potential reach.
Moreover, Google Cloud continues to experience rapid revenue growth and achieved its first operating profit in Q1. This development signifies the potential for Google Cloud to become a significant profit generator in the coming decade.
However, it is important to acknowledge that not everything is entirely positive for Alphabet, and there are certain unfavorable trends that investors should be aware of. One significant aspect is that in 2022, approximately 80% of Alphabet's total revenue came from advertising. While digital advertising has played a pivotal role in shaping Alphabet into the company it is today, recent years have demonstrated the cyclical nature of this market.
This cyclicality is understandable. During periods of economic uncertainty or when executives anticipate a looming recession, there is a reluctance to allocate substantial funds to marketing efforts. This cautious approach arises from concerns about the economic climate and potential constraints on consumer spending. In the first three months of 2023, Alphabet's ad revenue experienced a slight decline compared to the same period the previous year, highlighting the impact of these market dynamics.
Additionally, Alphabet has become a primary target for regulatory bodies, particularly in the European Union. The company has faced hefty fines amounting to billions of dollars for various antitrust violations, primarily related to its monopolistic dominance in areas such as Android and advertising technology.
The constant presence of government oversight and the potential impact on Alphabet's operations is an ongoing concern that shareholders must come to terms with. Navigating regulatory scrutiny is an inherent aspect of operating as a company of Alphabet's scale and prominence.
In our firm belief, the positive attributes of Alphabet outweigh the negative factors discussed earlier. Despite being a target for regulators for an extended period, the company has managed to sustain its growth momentum. Additionally, it is incredibly challenging to envision a scenario where Alphabet isn't a leader in the field of artificial intelligence, given its immense resources and capabilities.
While it is true that digital advertising is subject to cyclical trends, it remains a significant driver of Alphabet's revenue. Moreover, the economy is currently in a growth phase, which generally benefits the business. Therefore, the overall impact of the cyclical nature of the digital advertising market is mitigated to a certain extent.
Considering the valuation, as of the present moment, Alphabet shares trade at a trailing price-to-earnings (P/E) ratio of 27.1. This valuation is below its trailing five- and ten-year average valuations, indicating a potentially favorable entry point for new investors seeking to include this stock in their portfolios.
As long as the price is above 109.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 116.20
- Take Profit 1: 123.00
- Take Profit 2: 128.00
Alternative scenario:
If the 109.00 level is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 109.00
- Take Profit 1: 104.00
- Take Profit 2: 100.00
