When was the last time you used Google or YouTube? The chances are it was fairly recently. Tech giant Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) has a vast number of users for those services and others in markets worldwide. But despite that, the Alphabet stock price has tumbled 30% in the past year.
I have taken advantage of this price fall to add Alphabet back into my portfolio this week. Here is why I think I have just snapped up a bargain as a long-term investor.
Business moat
Famous investor Warren Buffett has does not own shares in Alphabet and has repeatedly rued the missed opportunity of not having made a move.
But I think Buffett’s approach to investing helps explain my own rationale for purchasing Alphabet stock. Buffett talks about a company having what he calls a “moat”, something that can help keep competitors/market invaders at bay. That gives a business pricing power, which can be good for profits.
I think Alphabet has a very large moat. Its installed user base is huge. They have invested time and effort in learning how to use the firm’s products, making it less likely for them to switch to another provider. The more they use it, the more tailored Alphabet can make its advertising proposition. That further boosts its attractiveness for advertisers.
That all adds up to a very profitable business model. Earnings last year came in at an incredible $60bn.
Challenging time
However, things could be getting harder for Alphabet. A challenging economy has led to many advertisers spending less.
Alphabet’s earnings in its most recent quarter showed a 34% year-on-year decline (though still weighed in at $13.6bn). That could be a sign of what lies in store in coming quarters as advertising budgets remain constrained.
On top of that, some investors are nervous that artificial intelligence will hurt the demand for search, which is core to Google’s revenues.
I’m not worried
I do think those are risks, especially in the short term. But over the long term, I believe Alphabet’s moat will help it continue to make large profits.
Advertising spend should come back sooner or later. Meanwhile, if Alphabet continues to innovate the way it has done many times before, it could actually find a way to turn artificial intelligence to its advantage.
In other words, I think its business model remains as strong as ever.
Quality on sale
But even a great business can be a bad investment if we overpay. That is why Buffett talks about buying shares in great businesses when they trade at attractive prices. I think that describes Alphabet right now.
The Google parent trades on a price-to-earnings ratio of around 20, which I see as a bargain for such a stellar business. The coming year or two may be tricky (though still with tens of billions of dollars in profits!)
But I think the business still has a great future. Alphabet stock looks like a Buffett-style bargain to me – so I have been scooping it up.
