In the past few months, I have felt there was an opening for investors due to the share price of Google parent Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL). Although I like the long-term prospects of the tech giant, I did not think the potential was properly reflected in the Alphabet stock price.
My investment is in the black, with Alphabet stock now 35% higher than where it started 2023.
But with that price increase, do the shares still offer investors a bargain?
The fall in Alphabet stock was partly caused by concerns about the impact that artificial intelligence (AI) might pose to Alphabet’s revenue streams. If users could receive information without needing to search for it, demand for Google services could fall sharply. That would also hurt advertising revenues badly.
Alphabet’s recent showcasing of its AI technology has reassured some investors that AI might not be as big a risk for the firm as they had feared.
I see it as both a risk and an opportunity. Fewer users for search services could definitely hurt revenues and profits at the digital giant. But if Alphabet can use AI to its advantage, I think the technology could actually make Alphabet’s suite of services more attractive to users, not less.
However, AI is only one of the risks currently facing the firm. An advertising downturn could also eat into profits. Indeed, in the first quarter, net income fell 8% year on year. Ad revenues from both Google and YouTube declined compared to the same period the prior year. The declines were modest but could be a sign of things to come.
The popularity of short-form video platform TikTok is also a risk if users spend less time on YouTube. So far, I do not think Alphabet has come up with an effective strategy to combat TikTok.
Set against those risks, however, I continue to believe the company has massive competitive strengths. Indeed, that is why I own Alphabet stock.
It has a huge base of users that have invested a lot of time learning how to use Alphabet services. In advertising, Alphabet’s scale and detailed understanding of users gives it a strong advantage over almost all rivals. The business is growing fast in some areas beyond search, such as cloud storage.
That should let Alphabet make huge profits for years to come, in my view, even though it will have to navigate risks along the way.
Valuing the shares
But while I like the business, I think the recent surge in Alphabet stock means that such commercial strengths are now priced in.
Currently the shares trade on a price-to-earnings ratio of 27. That is based on last year’s earnings, but if income continues to decline in 2023 as it did in the first quarter, the prospective ratio is even higher.
I do not see that as a bargain. By contrast, when Alphabet stock was changing hands for under $100 apiece earlier this year, I felt it offered me good value. So for now I will hold my shares, without planning to buy any more.