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Stock Analysis & Ideas

Alphabet: A Stable Growth Stock in Uncertain Times

One of the world-class tech stocks that many long-term investors have done well holding for the long term, Alphabet (GOOG) remains a core portfolio holding of many investors. Accordingly, GOOG stock is one that’s often looked at as a gauge of how market sentiment is from time to time.

Over the past month, sentiment has been shaky. Shares of this top tech stock have fluctuated up and down but have mostly trended downwards. Over the past month, GOOG stock has dropped approximately 10% and remains down for the year.

That said, zooming out on the stock chart, it’s clear that the long-term picture for this company remains strong. Alphabet reported very strong numbers in early February, leading to a marked spike in the company’s share price. However, since then, investors have sought fit to continue rotating out of tech, focusing on sectors such as energy and financials that have outperformed.

Over the long term, I remain bullish on Alphabet and GOOG stock. I think this company’s wide moat and strong, durable competitive advantage set it apart from many of its peers.

Here’s why now is certainly not the time for investors to panic-sell this long-term gem.

Cloud and Digital Ad Market Leadership Picking Up

Alphabet is a leader when it comes to digital advertising. Indeed, the company is also expanding its cloud-computing business to become a leader in this high-growth sector as well.

Via Alphabet’s recent earnings report, the company’s U.S. digital ad business saw growth of more than 38% on a year-over-year basis in 2021. Currently, Google accounts for more than a quarter of all U.S. digital ad spending, an incredible number.

The only platforms to come close are Facebook (FB), with a 24.2% share, and Amazon (AMZN), with an 11.6% share. Combined, these three companies control roughly two-thirds of the total ad spend for companies online. That’s pretty impressive.

Now, increased competition in this space, particularly from smaller players, leads to expectations that Google could lose market share in the digital advertising space. That said, the company’s strategy to shift much of its focus to its cloud segment is one that many long-term investors will like.

That’s because the cloud computing sector is estimated to be a $164 billion industry. As of right now, Alphabet is the third player in this race, behind Amazon and Microsoft. Should the company continue to grow its revenue meaningfully in this segment, there’s a lot to like about the upside for investors in the long term.

This segment is still a money-losing proposition for investors, with Alphabet taking a nearly $1.5 billion hit via its cloud business last year. However, over the long term, investors expect that Alphabet will not only be able to turn a profit but do so meaningfully as the industry consolidates.

A 20-for-1 Stock Split

Another key takeaway from Alphabet’s recent earnings was the announcement that Alphabet would be splitting its shares 20:1. This move essentially allows retail investors to pick up more shares in a given company.

While this doesn’t affect the percentage of the company an individual investor owns, it does change investor psychology. Broadly, these moves are seen as a positive for a given stock.

Accordingly, this was one of the key drivers behind the boom in GOOG and GOOGL stock following its earnings. Cooler heads have prevailed, and Alphabet has given up much of these gains. However, this split comes along with a special one-time stock dividend, which many investors like as well.

Wall Street’s Take

Turning to Wall Street, GOOGL stock comes in as a Strong Buy. Out of 30 analysts covering the stock, there are 30 Buy recommendations.

The average Alphabet price target of $3,499 implies 36.3% upside potential. Analyst price targets range from a high of $3,900 per share to a low of $3,000 per share.

The Bottom Line

Alphabet’s impressive size and scale in key markets are noteworthy. This company is still the leader in search in the U.S. and is likely to continue to be a growth-generating company for decades to come.

For long-term investors seeking some semblance of reliability, Alphabet is about as stable as growth stocks come. In this period of uncertainty, that’s a great thing.

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