Alphabet (GOOGL 0.47%) (GOOG 0.52%) is one of the most successful tech companies globally. The company's stock price has faced some pressure of late as part of the broad market sell-off. Adding to the pressure recently are macroeconomic headwinds that are increasing uncertainty and reducing demand from advertisers.
Focusing on the powerful headwinds like a looming recession and high inflation, it can be easy to forget that Alphabet is home to one of the most dominant businesses in the world: Google. So let's examine its prospects and consider its valuation to determine if investors should buy Alphabet stock at the moment.
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Alphabet's dominant position in the ad industry could get chipped away
According to Statista, Google's estimated market share for search engines is more than 80% worldwide. Another Alphabet property, YouTube, has 2.6 billion users. All this has undoubtedly helped the company grow revenue from $46 billion to $257 billion from 2012 to 2021. For many consumers, the journey toward making a purchase often starts with a Google search or a YouTube video. That process attracts advertisers that covet the opportunity to get their products and services exposure to potentially interested consumers.
Its dominant position in consumers' minds has allowed Alphabet to charge premium prices for its available ad inventory. As a result, the company has boosted its operating income from $13.8 billion in 2012 to $78.7 billion in 2021. That dramatic rise over the years shows that marketers are earning a healthy return on their investment, otherwise they would not continue allocating advertising dollars to the platform.
GOOG Revenue (Annual) data by YCharts
Indeed, businesses spent $763 billion on advertising in 2021. Alphabet's earned revenue of $257 billion in the same year points to a meaningful market share. But competition is intensifying in the digital ad market. Amazon has developed a robust advertising segment and is swiftly growing its share of advertisers' budgets. Netflix, with 222 million subscribers who watch hours of content daily, is said to be launching an ad-supported version later this year. And Walt Disney is launching an ad-supported version for its Disney+ streaming service.
Overall, the competition is hurting Alphabet in at least two ways. By adding advertising inventory to the marketplace, it will reduce the price per unit on ads (typically measured in clicks, impressions, or views). Additionally, the ad-supported versions will create more-affordable pricing for streaming content. That could take viewing hours away from YouTube, reducing the supply of advertising Alphabet can sell (unless it increases the number of ads per minute of viewing time).
Alphabet's stock has scarcely been cheaper in the last five years
GOOG PE Ratio data by YCharts
That said, the headwinds might already be priced into Alphabet's stock. Trading at a price-to-free-cash-flow ratio of 22 and a price-to-earnings ratio of 20, shares are arguably cheaper than they have been in more than five years.
The company has done an excellent job in bringing businesses and consumers together. Folks will always want to buy stuff, and companies will always want to sell things, and judging by Alphabet's sales, no intermediary has done a better job of helping both groups to transact.
The next several quarters look volatile, but Alphabet's bargain valuation and history of solid revenue and profit growth make buying the stock worthwhile.
