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One of the things that successful investors do is to honestly evaluate the bear cases in the stocks they own. Take a new investment in parent Google Alphabet (NASDAQ: GOOG), (NASDAQ: GOOGL) are examples.
While I’m very bullish on the long-term prospects for Alphabet stock, it’s been a while since I bought it. Shares are now 33% below year-ago levels. With a market capitalization of more than $1tn, the company is priced at a very high level of success in the future, which is not guaranteed.
Could it be a value trap?
Advertising revenue
One of the reasons behind last year’s fall is investor concern about what Artificial Intelligence (AI) will mean for the future of search. This has been catalysed by the release of ChatGPT product. However, it has been a problem for years.
Now, Google makes a lot of money when people spend time using its search service and being fed ads on the go. But if AI can provide relevant content without users even having to search, the number of ad impressions served could decrease compared to traditional search. This could be very bad news for Alphabet, which remains heavily dependent on advertising revenue.
Even aside from this strategic question is the more immediate one of whether economic weakness in many markets will hurt advertising – and Alphabet’s profits. In its most recent quarter, the business reported year-over-year revenue growth of just 1%.
During the economic cycle, as a long-term investor, I expect global ad spending to be strong. That money has to be spent somewhere — and Alphabet has shown over the past few decades that it can attract that spending and deliver the solutions that advertisers want.
Along the way it has adapted to dramatic changes in technology. When Google started, for example, the iPhone had not been invented. That gives me confidence that Alphabet will be able to use its skilled workforce, infrastructure and commercial sensibilities to navigate the changing world.
Company size
These assets are part of the other risks I see for Alphabet. It’s huge – and hugely profitable.
As we saw with Microsoft A few decades ago, I expected Alphabet to become a target for regulators who wanted to stop it from becoming too powerful.
This may mean that part of the company is broken. That’s not necessarily a bad thing for Alphabet stockholders. After all, if the company is forced to restructure, they should still have that number of shares.
It has been over a century since Standard Oil was forced to break up. The shareholders who keep the shares obtained as a result (incl Exxon) well done!
My movement
There are risks here, clearly. But Alphabet has a strong competitive advantage. Addressable markets are many and many. The user base itself is huge. And they have reason to stick with what they know and use.
The company has a unique advertising ecosystem that continues to generate huge revenue. Last year, net income fell – but still $60bn.
With a price-to-earnings ratio of 20, I see Alphabet Stock as a good value. That’s why I bought it.
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