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In the drop in Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) stock has been a blessing to me. A decade-low price-to-earnings (P/E) ratio has allowed me to dollar cost average and get cheap stocks.
That’s why I plan to buy more before the company reports earnings in early February.
Toothless 2022
Alphabet stock has been known for its strong and steady growth over the past decade. However, 2022 bucked this trend and sent the stock down 40%. Although this performance is not as bad as other constituents of the FAANG group like Meta and Netflix, It is worth noting that the conglomerate missed the earnings forecast for three consecutive quarters last year. Whether it will make it to next week’s race remains to be seen.
The combination of high inflation, rising interest rates, and the Russia-Ukraine conflict has put pressure on businesses to cut costs. And during an economic crisis, advertising is usually the first to go. So it’s no surprise to see Alphabet’s top and bottom lines suffer.
In addition, other avenues of revenue have been hit hard. TikTok continues to gain market share from YouTube while the platform’s Shorts feature erodes its own ad revenue. This led to a drop in revenue in YouTube’s Q3 numbers.
Pair the above with increased labor costs, more head count, and other groups Bets lost money, and it’s easy to understand why investor sentiment turned sour.
Write numbers
As a result, analysts spent 2022 lowering their earnings estimates for the stock. The consensus for Alphabet’s Q4 numbers doesn’t paint a pretty picture. Apart from the growing Cloud platform, Google’s business division is expected to grow in miniature and even decline.
| Metric | Q4 2022 (Agreement) | Q4 2021 | Projected growth |
|---|---|---|---|
| Total revenue | $76.65 billion | $75.33 billion | 1.6% |
| Earnings per share (EPS) | $1.21 | $1.53 | -21.6% |
| Looking for revenue | $43.3 billion | $43.3 billion | 0% |
| YouTube revenue | $8.20 billion | $8.63 billion | -5.0% |
| Google Cloud Revenue | $7.40bn | $5.54 billion | 33.6% |
However, there is a silver lining in the midst of all the doom and gloom – which is that stocks tend to fall ahead of earnings estimates. Since analysts project EPS to bottom out in Q2 this year, the bottom line for Alphabet stock may be here. After all, the stock price is up 15% from the bottom in November.
Furthermore, there are some indications that the tech giant could beat analysts’ estimates this time around. For one, slower hiring in Q4 should ease downward pressure on the bottom line. Second, the development of Shorts monetization can bring ad money back to YouTube. Most importantly, I argue, is the bearishness in the stock has been overdone, and any surprises up to the top and the bottom line can really see pop the price of the next Alphabet stock.
Safer bet to wait?
All that being said, there is no guarantee that my predictions will come true. Alphabet’s stock may be on the decline. However, I am not interested in timing the market. I am investing for the long term and will continue to dollar cost average if the stock declines. This is especially so when forward valuation multiples are at their lowest levels.
| Metric | Multiples of value | Industry average |
|---|---|---|
| Price-to-earnings (P/E) ratio. | 18.6 | 28.9 |
| Price-to-sales ratio (P/S). | 4.1 | 4.6 |
| Forward company value to EBITDA | 9.8 | 12.8 |
| Price-to-earnings growth (PEG) ratio | 1.1 | 2.5 |
What’s more, Alphabet’s balance sheet isn’t clean, meaning I don’t have to worry about my position being diluted or seeing potential earnings interfered with paying down debt. And with like Jefferies, Cowen, Goldman Sachsand many others support a strong buy with an average price target of $126, I see no reason to continue adding shares in Alphabet.
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