Alphabet (GOOG 0.74%) (GOOGL 0.55%) is one of the most influential companies in the world. But its valuation hasn't been immune to recent pressures that are creating turbulence for the stock market, and investors might be wondering what comes next. Read on to see two Motley Fool contributors present bull and bear cases for the tech giant's stock.
The bull case for Alphabet
Parkev Tatevosian: My bull case for Alphabet centers around its dominant position in a massive industry and its inexpensive valuation. Indeed, advertisers spent $763 billion globally in 2021 (excluding political ads), according to an estimate from GroupM. That was 23% higher than what they spent in the previous year. Moreover, the world will always have enterprises and institutions (and politicians) seeking to influence people's decisions through ads.
Alphabet's dominant position in this industry with Google and YouTube stands to benefit from this high demand. Google has an 85.5% market share for search engines worldwide. Meanwhile, YouTube has 2.5 billion monthly active users.
Even though the services are primarily free to users, Alphabet derives a significant benefit. Its revenue has grown from $110.9 billion in 2017 to $257.6 billion in 2021. The impressive top-line growth boosted Alphabet's annual operating profit from $28.9 billion to $78.7 billion in that time.
GOOG price to free cash flow. Data by YCharts.
Fortunately, investors can get Alphabet, with all its excellent prospects, at an inexpensive valuation. It is trading at a price-to-earnings ratio of 21, near the lowest it has been in the last five years. Similarly, its price-to-free-cash-flow value of 23 is near its lowest in the previous five years. It's hard not to be bullish on a company operating with a dominant position in a massive industry selling at a bargain price.
The bear case for Alphabet
Keith Noonan: For starters, I should say that I think Alphabet is a good investment and will likely significantly outperform the broader market over the next decade. On the other hand, the company does have some weaknesses, and investors should still consider the bear case.
Alphabet's core search and mobile operating systems remain strong and could very well be enough to power impressive performance. These are important product and service categories, and the company has top-tier positioning in both of them.
But with the U.S. likely heading into a recession and the global economy weakening, there's a risk that the company's core digital-ads business will post weaker-than-anticipated performance.
Alphabet also has a somewhat spotty track record for innovating and branching into new categories, particularly if you exclude successful integrations through acquisitions.
The company's Google Home and Nest smart-home products have been duds. Its Stadia game-streaming platform had a weak launch and seems dead in the water. Google Glass and Google Cardboard were interesting forays into augmented reality and virtual reality but have since been broadly abandoned. Its original-content production for YouTube has also been largely shelved. Those are just a handful of the projects that the company has tested out and abandoned.
While the difficulty innovating beyond its core advertising, mobile OS, and web services could present issues, it's also possible that the company will face regulatory challenges due to having such a strong tech ecosystem and position in the digital ads space. Alphabet still has a promising outlook, but with macroeconomic pressures, its tendency to pursue and kill off such a wide range of projects, and risks posed by regulators, there are things that could go wrong.
Should you buy Alphabet stock?
Despite some near-term headwinds and a checkered track record when it comes to choosing and sustaining potentially innovative products and projects, Alphabet looks like a worthwhile buy. The company's share price has been caught up in the broader pullback for growth-dependent software stocks, but the core business continues to look quite strong.
