Is Alphabet a Buy?
During the three-month period that ended Sept. 30, Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) posted revenue of $76.7 billion and diluted earnings per share of $1.55. These headline figures were better than what Wall Street analysts were expecting. So it's probably curious that the FAANG stock dipped 10% immediately following the announcement.
As of this writing, Alphabet's stock is 18% below its all-time high price and 12% below its 52-week high. Should investors take advantage of the dip and buy this business? Let's take a closer look.
Assessing the latest quarter
That revenue figure showed an 11% jump compared to Q3 2022. This was the first quarter since Q2 2022 that the company posted a double-digit gain.
Key to this was strong ad revenue, which is still Alphabet's crown jewel. Advertising sales totaled $59.6 billion, representing 78% of the overall business. What's more, YouTube's revenue of $8 billion came in ahead of consensus estimates.
Another bright spot was expansion of the operating margin, from 25% in the year-ago period to 28% in the latest quarter. Like many of its industry peers, Alphabet has been intensely focused on controlling its costs this year, adjusting to a lower-growth environment. It seems to be paying off thus far.
One possible reason the stock dropped after earnings was the weaker-than-expected revenue of the cloud segment. While sales did rise 22.5%, they missed Wall Street forecasts by a mere $20 million. Analysts think Google Cloud is losing market share to its bigger rivals, Amazon Web Services and Microsoft Azure.
Thinking about the big picture
I always stress how important it is for long-term investors not to get caught up in any single quarter's performance. If you plan to own a stock for five or 10 years, what happens in any three-month period is hardly important in the grand scheme of things. This same approach should be applied to Alphabet.
Yes, the market reacted negatively to the tech giant's latest earnings. But a valid question to ask is: Is this company's long-term competitive position under threat? I think the answer to that question, based on the facts, is a resounding no.
Let's focus on Alphabet's bread-and-butter search business. According to statcounter.com, it still has a monopolistic position, with just under a 92% share of the global market.
Is OpenAI's ChatGPT integration really enough for consumers to ditch Google and start using Microsoft's Bing search engine? It's a stretch for someone to believe this to be true. To be fair, the market could shift radically in the next few years, but that is almost impossible to predict. And right now Google is still the leader in search, and as a result of that, digital advertising as well.
In order to position itself for the AI wars, Alphabet has just agreed to invest $2 billion in Anthropic, an AI start-up that has created a chatbot that is a direct competitor to ChatGPT. Maybe more importantly, Alphabet is planning to launch Gemini, its internally developed generative AI model, which could be more versatile and powerful than OpenAI's offerings. This could quiet the doubters who think this business is falling behind.
Additionally, investors have to ask if the growth of AI will really bring about entirely new use cases for consumers and businesses, or if this revolutionary technology will simply improve what already exists. As of right now, it looks like the latter will happen. And "with 15 products that each serve half a billion people, and six that serve over 2 billion each," according to CEO Sundar Pichai, Alphabet already owns some of the most popular, widely adopted internet properties on the face of the planet. This gives it a huge leg up to introduce AI innovations to an existing user base.
At a current forward price-to-earnings ratio of 23.8, investors should rush to buy this stock.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, and Microsoft. The Motley Fool has a disclosure policy.
