Source: PaxForex Premium Analytics Portal, Fundamental Insight
Alphabet, the parent company of Google, has been under scrutiny due to various factors including the rise of artificial intelligence (AI) tools like ChatGPT, increased regulatory oversight, and a slowdown in digital advertising expenditure. Despite being a prominent player in the technology industry and involved in multiple ventures, Alphabet's stock performance has been met with more pessimism from investors compared to other major tech companies.
Although Alphabet has witnessed a modest increase of over 9% in the last 12 months, it continues to trail behind similar companies and the overall performance of the S&P 500 index.
While Alphabet has been regarded as a solid investment, it's essential to consider the timing of investing in the company. Despite its long-term potential, the current circumstances warrant careful evaluation.
Alphabet has been embroiled in extended legal disputes with European Union regulators for over a decade, primarily relating to antitrust violations. The company has faced substantial fines from the EU, including a $3.5 billion penalty in June 2017 and a fine exceeding $6.1 billion in September 2022. Recently, the European Commission notified Alphabet of its breach of EU antitrust rules, specifically in the advertising technology (adtech) industry. It is anticipated that the EU may impose another significant penalty, potentially surpassing $8 billion, as reported by Bloomberg.
Beyond the financial implications, the potential requirement for Alphabet to restructure and divest portions of its adtech business to maintain operations within EU countries is a more critical concern. This hurdle looms large considering that Europe, the Middle East, and Africa (EMEA) contribute 30% of Alphabet's revenue.
Taking all these factors into account, it is important to thoroughly assess the risks and potential consequences before determining whether it is the right time to invest in Alphabet.
Alphabet heavily relies on Google's advertising business, which contributed $54.5 billion out of its total Q1 2023 revenue of $69.7 billion. It accounted for over three-quarters of the company's fiscal 2022 revenue, emphasizing its significance to Alphabet's overall financial performance.
Despite a 2.6% year-over-year increase in Q1 revenue, Alphabet experienced an 8.2% decline from Q4 2022, and Google's advertising revenue declined for consecutive quarters. Recognizing the potential risks associated with a weakened advertising business, Alphabet has prioritized diversifying its revenue streams, particularly with the growth of Google Services and Google Cloud. Google Cloud revenue reached $7.4 billion in Q1, up from $5.8 billion in Q1 2022, and it has finally become profitable.
For Alphabet to ensure long-term sustainability, it must rely more on segments beyond Google advertising. This will likely involve a focused effort on strengthening Google Cloud, despite currently lagging behind competitors such as Amazon Web Services and Microsoft Azure in market share. However, the achievement of profitability in Google Cloud serves as an encouraging sign for investors.
Returning to the original question of whether Alphabet is a favorable investment at present, for long-term investors with a considerable time horizon, the answer is affirmative. Alphabet possesses the resources and resilience to withstand the challenges it faces. Concerns regarding Google search are valid but possibly overstated. While Alphabet may not rely on it as heavily as before, it will likely remain a significant revenue source in the foreseeable future.
However, the response becomes more complex for investors concerned about short-term stock performance. The overall hype surrounding the tech industry has propelled Alphabet's stock price by over 35% year-to-date as of June 23. Nevertheless, a market pullback, not only for Alphabet but for the tech sector in general, could be on the horizon.
Considering the circumstances, it may be an opportune time to gradually accumulate Alphabet stock through dollar-cost averaging. This approach involves regularly investing fixed amounts over time, reducing the impact of short-term market fluctuations.
As long as the price is above 114.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 118.49
- Take Profit 1: 123.00
- Take Profit 2: 129.00
Alternative scenario:
If the level of 114.00 is broken-down, follow the recommendations below
- Time frame: D1
- Recommendation: short position
- Entry point: 114.00
- Take Profit 1: 109.00
- Take Profit 2: 104.00
