Shares in Google and YouTube owner Alphabet (NASDAQ: GOOG) have experienced a significant pullback. This year, the share price has fallen from near $2,900 to around $2,160.
I own Alphabet stock and it’s one of my largest holdings. Has the recent share price weakness presented a good opportunity to buy more shares? Let’s take a look.
Short-term risks
In the short term, the risk that concerns me here is a recession could impact revenues. You see, while Alphabet is a diversified company, it makes the bulk of its money from digital advertising on both its Google and YouTube platforms.
However, in a recession, companies often slash their advertising budgets in order to conserve capital. So Google could potentially see its revenues decline if economic conditions continue to deteriorate. This could put pressure on the share price in the near term.
It’s worth noting that several brokers have reduced their price targets on the back of recession fears. UBS, for example, just lowered its price target to $2,650 from $3,600.
Long-term growth story
Looking at Alphabet from a long-term investment perspective however, I’m still very bullish. In the long run, I expect the digital advertising industry to get much bigger.
According to ResearchandMarkets, the global digital ad market is projected to be worth $1.5trn by 2030, up from around $375bn in 2020. Alphabet, as one of the biggest players in the market, is well positioned for growth.
The growth story here is not just about digital advertising though. Cloud computing is another area that could propel revenues higher. At present, Alphabet is the third largest player in the cloud market behind Amazon and Microsoft. Last quarter, its cloud revenues were up 44%.
This market is projected to enjoy double-digit annualised growth between now and 2030 as businesses around the world continue to go digital. This should provide strong tailwinds for Alphabet.
Additionally, I’m quite excited by the potential in artificial intelligence (AI). This industry – which is still in its infancy – has considerable growth potential and Alphabet is a leader in the space as it has acquired a ton of AI companies over the years.
Valuation
Meanwhile, Alphabet stock also appears to have an attractive valuation right now. For 2022, analysts expect the group to generate earnings per share of $112. At the current share price, that puts the stock on a P/E of just 19.
It’s important to understand however, that if earnings (the ‘E’ in the P/E) were to come in lower than expected, the P/E ratio may actually be much higher. For example, if earnings for the year end up being $80 instead of $112 due to advertising weakness, the P/E ratio is closer to 27.
Alphabet stock: should I buy?
Considering all of the above, I would be comfortable buying Alphabet stock today. The share price could be volatile in the short term. However, in the long run, I think it’s likely to rise as the technology powerhouse grows its revenues and profits.
