This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Investors are incredibly negative on Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) stock. On the surface, they may have a good reason to be, as Alphabet's primary business is under attack from all directions. There are three primary threats to Alphabet's current operation: AI, economic headwinds, and government. All three of these could spell trouble for Alphabet, but I still think that these concerns aren't enough to warrant Alphabet's dirt cheap stock price.
Alphabet's stock rarely gets this cheap, and right now could be a once-in-a-decade opportunity to scoop up shares at a historically low valuation.
The threats to Alphabet's business are real
First, let's tackle the three concerns that I've outlined for Alphabet's business. AI is obviously one that investors are worried about, especially when high-ranking managers from Apple (NASDAQ: AAPL) testify in a federal court that they believe traditional search engines will be replaced by AI. Google search accounted for 56% of revenue in Q1, so this is clearly a massive part of its business model.
To think that Alphabet's management is completely blind to this threat is a mistake, and they're combating it by promoting AI search summaries at the top of results on its Google search engine. This bridges the gap between traditional search and AI for many consumers, which may be enough to keep Google at the top. Additionally, Google search saw its revenue rise 10% year over year in the first quarter. Generative AI models have been out for nearly three years now, and if there were an exodus from using Google search, it likely would have shown up in the results by now.
Moving to general advertising revenue, Alphabet is incredibly dependent on this revenue stream. In Q1, 77% of revenue came from advertisements (Google search is grouped into this area). Advertising is cyclical, as demand for ads rises and falls with general economic sentiment. Many businesses fear that we're heading directly for a recession due to tariffs. Whether this pans out isn't really the point here; investors need to know that advertising revenue rises and falls with economic cycles. So, just because Alphabet's ad revenue may fall in the future, it doesn't mean it won't come roaring back once the economy has gotten back on track.
Lastly, Alphabet has been found guilty of operating two illegal monopolies, one in the search business and another on its advertising platform. One of the remedies that has been proposed is forcing Alphabet to sell its Google Chrome browser, although there is still more discussion involved on this front. We're still far from knowing how the government will break up Alphabet, if it does so at all. Additionally, various appeal processes will likely land this case in front of the Supreme Court, which will take even more time.
Predicting the outcome of this case is practically impossible, and investors shouldn't attempt to. However, the market has already assumed that there will be a negative result, which is why the stock trades for as cheap a price tag as it does.
Alphabet's stock is seldom this cheap
From a price-to-earnings (P/E) standpoint, Alphabet's stock rarely reaches these valuation levels.
GOOGL PE Ratio data by YCharts
If an investor were presented a stock that trades at 18 times trailing earnings that grew revenue and earnings per share (EPS) by 12% and 49%, respectively, in Q1, you'd think this was a no-brainer buy.But, because Alphabet's name is attached to it, investors are worried.
The market is incredibly concerned about external threats facing Alphabet, and while those threats are real, I think the market has already priced in a worst-case scenario for all three, even though I think Alphabet is well equipped to face two of them (the government threat is real but impossible to predict).
As a result, I think investors can cautiously take a position in Alphabet stock with the expectation that it might take some time for it to recover. If it does, it could be one of the best-performing investments over the next decade thanks to a one-two punch of growth and multiple expansion.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
