Last week, the Nasdaq Composite index managed to end a seven-week losing streak, generating its first positive week of trading since early April. Even with last week's rally, the Nasdaq is still in bear market territory (it's down 25.3% from all-time highs set in November). One stock that has tumbled in tandem with the Nasdaq is tech giant Alphabet (GOOG -1.96%) (GOOGL -1.97%), the parent company of Google. Share prices are down about 23.9% from November highs.
Long-term investors looking for bargains tend to take closer looks at great companies trading in bear market territory. So is now the time to snap up shares of Alphabet? Let's have a closer look at two reasons to buy the stock now and one reason investors might want to wait.
Image source: Getty Images.
1 reason to buy: Google's share of the digital ad market
The digital advertising market is enormous. The Interactive Advertising Bureau (IAB) estimates it totaled $189 billion in 2021. By comparison, the entire U.S. automotive market in 2021 totaled less than $83 billion, according to one estimate. What's more, IAB reports that the 2021 digital ad market grew 35% in comparison to 2020.
Source: eMarketer, Statista. * 2021-2023 figures are forecasts. Note: Ad revenue includes ads that appear on desktop and laptop computers, mobile devices, and other internet-connected devices.
Google, through its various ad-related properties, has the largest share of the digital advertising market in 2022 at almost 28%, with its main competitor, Meta Platforms, holding roughly 24% market share. And while Amazon is projected to grow its share of the digital ad market to 14.6% by 2023, Alphabet is still the top dog in digital advertising and should benefit from the 35% growth rate in this market.
Moreover, the bulk of Google's ad revenue (about 70%) is from its search unit, which sells highly targeted ads based on Google Search results. The company also has lucrative ad businesses built around Gmail, Google Maps, and Google Play Store. If that weren't enough, Google's YouTube and YouTube TV businesses offer space for video advertising.
Reason 2 to buy: Alphabet stock looks cheap
One valuation metric I'm fond of is the price/earnings-to-growth (PEG) ratio. To calculate this ratio, you divide a company's price-to-earnings multiple by its growth rate. So for a company with a P/E ratio of 20 and year-over-year sales growth of 20%, its PEG ratio would be 1.
GOOG PEG Ratio data by YCharts
While creating a hard and fast rule is difficult, a PEG ratio under 1 generally indicates an undervalued company. And as you can see, Alphabet's PEG ratio is 0.43, well below its three-year average PEG ratio, which at 0.95, is very close to 1.
1 reason to wait: Snap's earnings warning
If there is one thing holding back Alphabet (and many other stocks) at the moment, it's the fear of a recession. If the economy takes a nosedive in the next 12 to 18 months, companies will pare back spending, and one of the first things they'll cut is advertising.
Snap (SNAP 2.89%) made headlines two weeks ago when it pre-announced a revenue and earnings miss for the second quarter. This shocked the market since Snap had only released its second-quarter guidance four weeks earlier. The rush to pre-announce indicated that the ad market (at least for Snap) deteriorated very quickly in April and May.
One reason to wait on buying Alphabet would be the steep decline in ad revenue that Snap has foreshadowed. If the pullback in the ad market is real, Alphabet might struggle to hit its own projections for earnings and revenue in the short term and that could lead to further price drops. This might give long-term investors an even better entry point later this year.
