Source: PaxForex Premium Analytics Portal, Fundamental Insight
Chances are that you, like most, think you missed the Alphabet train. The company's stock is up 25 percent from its 52-week low, and the emergence of artificial intelligence ChatGPT represents the first real competitive threat to the company's search engine in years.
However, investors may not understand the nature of the company or forget the existing reasons to buy Alphabet stock. Therefore, they should look at Alphabet from a macroeconomic perspective before discounting the company.
Despite all the concerns about its place in search, Alphabet has moved far away from the advertising-funded search engine through which the company has grown to its size. With a growing interest in other parts of the technology industry, the company has worked for years to move away from its ad-dependent model. It should be noted that Google's parent company is not moving very quickly in this direction, as 79 percent of Alphabet's revenue last year still came from advertising.
Nevertheless, Google Cloud has become a major source of non-advertising revenue. It accounts for 9% of Alphabet's revenue in 2022, up from just over 7% the previous year.
In addition, analysts estimate that Alphabet owns numerous companies. These include healthcare company Verily Life Sciences, artificial intelligence venture DeepMind, and autonomous driving company Waymo.
Alphabet allows most of these companies to operate under different brands and rarely breaks down the financials separately for these businesses. Nevertheless, if advertising growth continues to slow, it should not surprise investors if some of these companies become more prominent within Alphabet.
If Alphabet's multiple companies can't save it from an advertising slump, its balance sheet can. Long-term success in advertising has made the company rich by any measure. Alphabet boasts nearly $114 billion in liquidity. Although that amount is down from $140 billion in 2021, the cash reserves leave Alphabet with considerable leeway.
Investors should not expect the amount of cash to shrink much. Alphabet generates about $60 billion in free cash flow in 2022 alone. Thus, even if some concerns about Google's competitiveness in search prove true, Alphabet is poised to generate revenue from a host of other sources.
However, the price action at Google's parent company doesn't seem to take a macroeconomic perspective into account. After hitting a high (adjusted for share splits) of more than $152 per share last February, the company's stock has steadily declined amid a bear market in technology and a downturn in the digital advertising industry.
What's more, concerns about ChatGPT caused the stock price to drop to $83 a share, about 45% from its peak to its low. The stock has recovered slightly since November, though it is still selling at a 30 percent discount from its high in early 2022.
In addition, the price momentum has driven its price-to-earnings (P/E) ratio down to 23. This makes it a cheaper stock than all of its mega-tech peers.
Given the company's macroeconomic condition, investors probably have an opportunity to buy Alphabet stock. Of course, it remains unclear when ad spending will recover, and ChatGPT poses a real competitive threat to the search engine.
Nevertheless, even in the unlikely scenario that Alphabet loses its edge in these businesses, the company has plenty of other investments in the business and a cash reserve of $114 billion. These two factors allow Alphabet to expect a long-term recovery, regardless of how the search and digital advertising business develops.
As long as the price is above 96.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 102.47
- Take Profit 1: 107.00
- Take Profit 2: 113.00
Alternative scenario:
If the level of 96.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 96.00
- Take Profit 1: 92.00
- Take Profit 2: 89.00
