Source: PaxForex Premium Analytics Portal, Fundamental Insight
One of the most dominant companies in the world, Alphabet owns the Google search engine, the YouTube video platform, and the Android operating system. Despite no slowdown in business activity, Alphabet stock is down more than 20% from its all-time high, and now seems like a good time to buy the stock. Investors may be worried that the recession will affect Alphabet, but the words "recession" and "slow" weren't even mentioned in the company's latest earnings report.
Alphabet's ownership dominates: Android has a 71 percent share of the mobile operating system market and Google has an 86 percent share of the desktop search engine market. YouTube leads the way among online video platforms, and Google Cloud is also doing well, though it lags behind Amazon AWS and Microsoft Azure.
There's nothing difficult about a leader in large, important business segments such as these being worth more, but Alphabet's stock trades at about the same valuation as the S&P 500, which is made up of shares of the 500 largest U.S. companies. The S&P 500 currently trades at about 19.7 times earnings, which is almost identical to Alphabet.
Not only does Alphabet trade near the price-to-earnings (P/E) ratio of the S&P 500, but it also has the lowest valuation in a decade. Alphabet makes up almost 4% of the S&P 500's market weighting and is the third-largest component, but the other five largest companies trade at much higher valuations than Alphabet. A multi-industry leader like Alphabet trades below average. In our view, that doesn't make sense.
Fears of a recession hang over the market, and recessions usually force companies to cut their advertising budgets. The decline in sales could be a big problem for Alphabet since 80% of its first-quarter revenue came from advertising. Fears that this will happen are the reason why the company's stock is trading at a discount to its overall market earnings ratio.
However, we believe these concerns are exaggerated.
Last quarter, Alphabet's total revenue grew 23% year over year, with the advertising business up 22%. Alphabet did not see a slowdown in advertising spending in the first quarter, and while it may do so in the future, the company continues to strengthen.
If the recession does affect Alphabet's growth, it will still be a money-generating machine. In the first quarter, 23% of revenue ($15.3 billion) turned into free cash flow. The free cash flow will be added to Alphabet's huge current cash pile of $140 billion, which can be used to buy back stock, fund acquisitions, or pay down debt.
Alphabet also spent nearly $10 billion on real estate and equipment in the first quarter, the most of any quarter. If Alphabet were feeling the pressure, it might cut back on spending on new offices and data centers.
We think too many investors are applying Snap's lower ad revenue forecast to Alphabet. But this compares the world's 12th-largest social media company by monthly active users to the world's largest search engine and video platform. We don't doubt Snap's management's benchmarks, but its platform doesn't rank as high on the list of places companies spend their ad budgets.
Advertisers value YouTube and Google more than Snap, so a drop in advertising for Snap won't necessarily mean a drop for Alphabet.
Could there be a recession that would lead to a decline in Alphabet's revenue? Absolutely, and we don't know exactly when. But a decline in earnings is already built into Alphabet's valuation, as its P/E ratio is the lowest in the company's history. If Alphabet reports solid numbers in the second quarter, we can expect a sharp rise in the stock as the skeptics turn out to be wrong.
Today is a fantastic opportunity to acquire one of the most dominant companies on the market. While no one knows exactly when the stock will reverse, the price will be higher in three to five years due to the dominance of the brands under the company's umbrella.
As long as the price is below 2211.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 2143.00
- Take Profit 1: 2040.00
- Take Profit 2: 1940.00
Alternative scenario:
If the level of 2211.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 2211.00
- Take Profit 1: 2365.00
- Take Profit 2: 2465.00
