Is Alphabet's Stock a Buy Now?

Alphabet's (GOOG -1.10%) (GOOGL -1.23%) stock price dipped 3% during after-hours trading on April 26 following the release of its first-quarter earnings report.

The tech giant's revenue rose 23% year over year to $68.01 billion, which missed analysts' estimates by $90 million. Its net income fell 8% to $16.44 billion, or $24.62 per share, which also missed the consensus forecast by $1.14. That represented its first-bottom line miss in two years.

Alphabet's stock had already declined with the broader tech sector this year as inflation, rising interest rates, and other macro headwinds drove investors away from higher-growth stocks. Following its post-earnings dip, it's shed about 20% of its value since the beginning of 2022.

Image source: Getty Images.

Should investors ignore Alphabet's recent earnings miss and accumulate some more shares at these depressed levels? Let's weigh its near-term challenges against its long-term strengths to find out.

Alphabet's core businesses are still growing

Last year, Alphabet generated 81% of its revenue from Google's advertising business, which includes Google Search, YouTube, and its advertising network.

Another 11% came from Google's "other" non-advertising businesses, which include Google Play, YouTube subscriptions, and its hardware division. Google Cloud contributed 7% of its revenue. Here's how those three divisions fared in the past two years and the first quarter of 2022:

Data source: Alphabet. YOY = Year over year.

Google's advertising growth decelerated in the first half of 2020 as the pandemic disrupted the global economy, but it recovered quickly as those headwinds passed. Therefore, its 22% growth in the first quarter actually represents a return to its pre-pandemic growth rates instead of a slowdown.

Google's Search, YouTube, and Network segments all grew their ad revenues at double-digit rates during the first quarter.

YouTube's growth decelerated as it faced a tough year-over-year comparison and some slower spending in Europe after Russia's invasion of Ukraine, but its broader advertising business still seems well-insulated from Apple's recent privacy changes, which tripped up other big advertisers like Meta Platforms. 

Google relied on the growth of Google Cloud, the third-largest cloud infrastructure platform after Amazon (AMZN -2.56%) Web Services (AWS) and Microsoft (MSFT -1.27%) Azure, to offset its temporary decline in ad revenue back in 2020. Yet Google Cloud continued to generate more than 40% revenue growth after its advertising business recovered.

That consistent growth indicates that plenty of large customers, especially retailers, that don't want to feed Amazon's most profitable business or tether themselves to Microsoft's prisoner-taking enterprise software ecosystem.

During the conference call, Google CEO Sundar Pichai also attributed its cloud growth to the growing demand for cloud-based cybersecurity services (which it's addressing with its planned takeover of Mandiant), AI tools for analyzing data clouds, and hybrid work solutions.

Analysts expect Alphabet's revenue to rise 18% this year, and to grow another 16% in 2023. Based on those expectations, its stock trades at just five times this year's sales.

But what about that big earnings miss?

Alphabet's top-line growth looks stable, but its declining net income and earnings miss seemed to spook investors. However, its operating margin remained nearly flat year over year at 30%, and its operating income actually increased 22% to $20.09 billion.

Within that total, Google Services' operating income rose 17% to $22.92 billion. Google Cloud remained unprofitable, but it narrowed its operating loss from $974 million to $931 million. Its "other bets" segment, which houses experimental businesses like Waymo and Verily, also barely widened its operating loss from $1.14 billion to $1.16 billion.

Digging deeper, we'll see that Alphabet's earnings miss was actually caused by a loss of $1.2 billion on the "other income and expense" line. It attributed that red ink to unrealized losses in its equity investment portfolio, which CFO Ruth Porat blamed on the recent "market volatility."

In other words, Alphabet's profit decline should be temporary. It still expects to ramp up its spending and face some foreign exchange headwinds from a stronger dollar, but analysts still expect its earnings to grow 4% this year and 18% in 2023. Those estimates give Alphabet a forward price-to-earnings ratio of 20, which makes it look more like a value stock than a growth stock.

That's probably why Alphabet spent 58% of its $89 billion in FCF on buybacks over the past 12 months. It also just added another $70 billion to its current buyback plan, which implies its stock is dirt cheap at these levels.

Alphabet is still a great long-term buy

Alphabet still has plenty of room to grow over the next few years (or decades) as its search, advertising, and cloud businesses continue to blossom.

There's nothing fundamentally wrong with Alphabet's business, yet the recent retreat from the tech sector has reduced its multiple to lower levels than slow-growth consumer staples stocks like Coca-Cola and Procter & Gamble. That jarring disparity indicates it's time for investors to tune out the near-term noise and accumulate more shares of Alphabet.