Tech stocks experienced a sharp selloff after Federal Reserve Chairman Jerome Powell told investors his priority was to keep inflation under control. Admittedly, this is bad news for stocks in the short term. To slow the pace of inflation, Powell will likely continue to raise interest rates, reducing available capital.
However, such conditions alphabet (Google 1.41%) (GOOG 1.28%)Google’s parent company is less reliant on consumer spending apple Also Amazonand its lines of business, financial position, and valuation should enhance the attractiveness of its stock in tougher times.
alphabet business
You might not think Alphabet is a recession-proof company. In the past, revenue was generated from ads on search engines and the YouTube video platform. Advertisers may not want to spend either, as consumers are likely to have less revenue to spend.
Nevertheless, market research firm Technavio forecasts that the digital advertising industry will grow at a compound annual rate of 11% through 2026, despite increasing competition in online advertising. In the first half of 2022, Alphabet generated about $111 billion (81% of the total) of his $138 billion in revenue from advertising.
While advertising remains dominant, Alphabet is relying more on Google Cloud. Enterprises are turning to cloud services to reduce costs and give enterprises better control over connectivity, security, deployment, and data. These added efficiencies are likely attractive to businesses looking to save money during difficult times.
Many businesses rely on Alphabet for such services. Synergy Research reports cloud revenue grew 34% last year. Google Cloud claims his 10% share of that market, trailing Amazon with 33%, microsoft twenty two%.
financial benefits
In the first half of 2022, Google Cloud generated $12 billion in revenue. That’s just 9% of Alphabet’s revenue, but the segment grew 39% compared to the same period in 2021. By comparison, Alphabet’s overall revenue increased by 17%. Additionally, Google Cloud only accounted for his 5% of his 2019 revenue. This shows that Google Cloud is slowly becoming an important part of the company.
However, the financial metric that best describes the Alphabet case is liquidity. Together with cash equivalents and marketable securities, we have $125 billion in liquidity. That’s down from his $140 billion at the end of 2021, but leaves Alphabet with one of the strongest cash positions among public companies. Alphabet therefore has sufficient capital to operate and expand its business, even as the Fed maintains a tight lending policy.
Alphabet Equity Positioning
Despite these advantages, Alphabet suffers disproportionately in the current environment. Last year it lost almost a quarter of its value. While not as badly hit as some growth tech stocks, S&P 500.
Nevertheless, the decline may have made it one of the best stocks FAANG has ever held, from a valuation perspective. The price-to-earnings ratio is now 21x, even as Alphabet continues to post his double-digit earnings growth.
Moreover, the revenue multiple is lower than that of cloud rivals Amazon and Microsoft, trading at 26x and 27x respectively. Such a valuation advantage could be a reason for investors to choose Alphabet over other megatech rivals.
GOOG PE ratio. Data from YCharts.
Considering Alphabet in an environment of rising interest rates
Alphabet looks poised to sidestep most of the difficulties many tech companies will soon face. Online advertising spending continues to grow, and its largest emerging segment, Google Cloud, must remain resilient as businesses look to save costs.
Plus, its cash savings make it one of the safest companies to invest in during tough times. Combine these aspects with low returns and telecom stocks look like safe havens with continued growth potential.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Alphabet executive Suzanne Frey is a member of The Motley Fool’s board of directors. Will Healy has no positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple and Microsoft. The Motley Fool recommends the following options: Apple’s March 2023 $120 Long Call and Apple’s March 2023 $130 Short Call. The Motley Fool’s U.S. headquarters has a disclosure policy.
