Alphabet (GOOG +0.27%) (GOOGL +0.20%), the parent company of Google, has been a resilient stock for long-term investors. The tech giant's shares have rallied 750% over the past 10 years, easily beating the S&P 500's gain of about 220% over the same time frame. Even as inflation, rising interest rates, and other macroeconomic headwinds have crushed many high-growth tech stocks over the past 12 months, Alphabet's stock advanced nearly 35%.
Alphabet's latest earnings report in February, which topped analysts' expectations and revealed a forthcoming 20-for-1 stock split, indicated that its stock still had plenty of room to run. So is it still safe to buy Alphabet in this challenging market? Let's review the bear and bull cases to decide.
Image source: Getty Images.
What the bears will say about Alphabet
The bears expect Alphabet to face three main challenges: regulatory threats, macroeconomic and competitive challenges for its advertising business, and ongoing losses at its cloud business.
First and foremost, Alphabet's dominance of the online search, digital advertising, mobile operating system, and mobile app store markets have made it a huge target for antitrust regulators across the world.
Google has already been fined nearly $10 billion across three European Union cases, which claim it leveraged its search dominance to promote its own shopping service, that it suppressed competing advertising platforms, and that it bundled first-party apps with Android to suppress competing apps.
Google has appealed all three rulings, but the three cases could still weaken its Europe, Middle East, and Africa (EMEA) business, which generated 31% of its revenue in fiscal 2021, because the company might need to untangle its first-party services from its core search engine and unbundle key Google services from Android.
Google was hit by a lighter $177 million fine in South Korea for its monopolization of mobile operating systems, while two other cases in India -- which mainly focus on Android and Google Pay -- haven't been resolved yet. In the United States, it faces four ongoing state and federal lawsuits regarding its search, advertising, payments, and app distribution platforms.
All those headwinds could threaten Alphabet's core advertising business, which generated 81% of its revenue in 2021. This business also faces fierce competition from other tech giants like Meta Platforms (FB 0.55%) and Amazon (AMZN +1.25%), and it's sensitive to macroeconomic headwinds.
Alphabet relied on Google Cloud's growth to offset the pandemic's initial impact on its advertising business in 2020. Google Cloud's revenue jumped 47% to $19.2 billion in 2021 and accounted for 7% of Alphabet's top line, while its operating loss narrowed from $5.6 billion to $3.1 billion.
That progress is encouraging, but Google still only controlled 9% of the global cloud infrastructure market at the end of 2021, according to Canalys, putting it in a distant third place behind Amazon Web Services (AWS) (33%) and Microsoft's (MSFT +1.62%) Azure (22%). If Google aggressively chases those market leaders with loss-leading strategies as its advertising growth slows down, its margins could deteriorate.
NASDAQ: GOOGL
Key Data Points
What the bulls will say about Alphabet
The bulls believe the regulatory challenges won't throttle Alphabet's long-term growth because it's already conquered so many markets.
In addition to the world's top search engine and mobile OS, Alphabet also owns the top free streaming video platform (YouTube), the most popular web browser (Chrome), the leading webmail platform (Gmail), and other widely used services. It's also been expanding its ecosystem with hardware devices, and it's been quietly incubating "moonshot" businesses like driverless cars at Waymo and experimental life science products at Calico and Verily.
If you believe Google's services will remain the beating heart of the internet over the next few decades, it makes sense to look past its near-term regulatory noise and focus on the long-term growth potential of its services.
Google will inevitably face fierce competition from Meta, Amazon, and other competitors, but it will also likely remain a default choice for companies that need to quickly build a brand presence online. With regards to the macroeconomic challenges, the bulls will point out that Alphabet's revenue has steadily climbed since its IPO in 2004 -- even though it endured two major recessions and more than a dozen financial crises over the past 18 years.
Source: YCharts
As for Google Cloud, the bulls believe it will lock in more retailers and smaller software-as-a-service companies that don't want to feed Amazon's most profitable business. It could also attract customers that don't want to tether themselves to Microsoft's prisoner-taking enterprise services.
Lastly, Alphabet trades at just 23 times forward earnings, making it the second-cheapest FAANG stock after Meta. That's also a low multiple for a company that is expected to grow its earnings at an average annual rate of about 20% over the next five years.
Why I'm staying bullish on Alphabet
Alphabet's low valuation, stable growth, and firm profitability could make it a safe haven stock in this challenging market. The regulatory headwinds could depress its near-term valuations, but I believe it will continue to generate solid returns for investors over the next few decades.
