Source: PaxForex Premium Analytics Portal, Fundamental Insight
It's highly likely that you interact with one of Alphabet's products or services on a daily basis. This tech giant has become an integral part of our lives, and its long-term success may have been somewhat taken for granted by many investors. While the stock has delivered solid returns, it's currently trading 8% below its all-time high.
Is this dip an opportunity to acquire shares of one of the best businesses at a slight discount from its peak price? Let's explore both the bullish and bearish arguments for this leading tech stock.
One immediate argument against adding Alphabet to your portfolio is the growing popularity of Open AI's ChatGPT, a large language chatbot powered by artificial intelligence (AI) that has been integrated into Microsoft Bing's search engine. Some bearish viewpoints suggest that this could pose a threat to Google Search, a service that has historically dominated the market, potentially making Bing more popular.
Additionally, if more search queries are answered conversationally instead of presenting a list of links, there may be reduced ad inventory for Alphabet to sell. This could potentially impact one of the company's key revenue-generating segments.
Like its major tech counterparts, Alphabet consistently finds itself in the crosshairs of regulators, both in the United States and abroad, particularly in Europe. The company has faced substantial fines in the past for various reasons, and it is currently under scrutiny by the Department of Justice over Google Search's alleged monopolistic position. The outcome of this regulatory battle remains uncertain, and investors may find it disconcerting to have this risk constantly looming.
The fact that governmental agencies represent one of Alphabet's primary concerns underscores the company's significant success. However, it's challenging to predict how regulatory bodies might reshape the competitive landscape, potentially undermining Alphabet's dominant position and affecting its financial performance.
A more immediate concern is the significant slowdown in the digital advertising market. After posting a robust 41% revenue growth in 2021, Alphabet's sales increased by less than 10% in 2022 and only 5% in the first half of this year. This highlights the cyclicality of the industry, as ad spending is easily cut back during economic downturns, exposing Alphabet's business to macroeconomic factors.
The fact that Alphabet faces regulatory threats highlights the incredible dominance this company has achieved, arguably making it one of the most remarkable businesses in history. According to CEO Sundar Pichai, Alphabet boasts "fifteen products that each serve half a billion people and six that serve over two billion each." These mind-boggling statistics are difficult to fully grasp.
From a financial perspective, Alphabet's performance underscores its success. In the last quarter (Q2 2023, ending June 30), the company boasted an outstanding operating margin of 29%, and it generated a whopping $22 billion in free cash flow. The balance sheet is exceptionally strong, with $118 billion in cash, cash equivalents, and marketable securities, compared to just $14 billion in long-term debt.
Thanks to a wide economic moat, investors likely don't need to fret about Alphabet relinquishing its leading position anytime soon. Network effects form the bedrock of the company's operations. As the internet continues to expand with more data and users, the importance of Google Search in organizing this ever-growing pool of information becomes increasingly evident. Greater usage also attracts more advertising dollars, making the company even more potent as it scales up.
Alphabet possesses a significant data advantage that will only become more pronounced over time. Data empowers the company to better match targeted ads with the right audience. Additionally, the collection and analysis of data drive ongoing product improvements, enhancing customer utility and generating even more data in a virtuous cycle.
Another compelling bullish argument is that Alphabet is well-positioned to be a leader in the AI landscape if it isn't already. AI technology has already been an integral part of the company's operations for years, as seen in applications like Gmail, Maps, and YouTube. Pichai has articulated a vision of Alphabet as an "AI-first" enterprise. With popular services used by a vast number of customers, Alphabet benefits from having platforms where it can readily introduce AI initiatives, ensuring the company remains at the forefront of innovation.
As long as the price is above 126.00, follow the recommendations below::
- Time frame: D1
- Recommendation: long position
- Entry point: 130.79
- Take Profit 1: 139.00
- Take Profit 2: 145.00
Alternative scenario:
If the level of 126.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 126.00
- Take Profit 1: 120.00
- Take Profit 2: 116.00
