The Nasdaq Composite is down 23% year to date, creating an opportunity for investors to shop for deals in the market. Among the deals worth exploring is Google's parent company, Alphabet (GOOG -1.96%) (GOOGL -1.97%). Fresh off a 20-for-1 stock split, this tech giant belongs on your investment radar.
Let's explore three reasons this FAANG stock could be a great way to bet on a tech rebound.
1. Alphabet shares are relatively cheap in price, valuation
A stock split divides a company's share price without changing its market cap (the value of all its shares outstanding). This process makes the stock more accessible to smaller investors because full shares are available at a more reasonable price (some investors don't have access to fractional-share trading). That said, Alphabet's stock split comes at the tail end of a 25% year-to-date decline, which should put it on the radar of value-focused investors.
With a market cap of $1.5 trillion, Alphabet is one of the largest companies in the world. But with a forward price to earnings (P/E) multiple of just 20, the company is actually cheaper than the Nasdaq's average of 25 despite reliable growth drivers and rock-solid economic moat.
2. Alphabet has an unbeatable economic moat
Coined by investing legend Warren Buffett, the term "economic moat" refers to a company's ability to sustain an advantage over rivals to protect its market share and profit margins. With a market share of 92% in internet search, Alphabet's Google trounces competitors like Microsoft's Bing or the privately held Yahoo!, which have market shares of just 3% and 1%, respectively. Industry-watchers claim (and my personal experience agrees) that Google simply provides better results because of its complex algorithms designed to sort web pages by quality and relevance.
Image source: Getty Images.
Google's scale creates a positive feedback loop because it has more user data to work with, helping it continuously improve its search algorithms and better match advertisements with the most engaged users for a particular product or service. Alphabet's revenue jumped 23% year over year to $68 billion, with Google advertising (which includes revenue from YouTube) representing $54.6 billion, or 80% of the total.
3. YouTube is a powerhouse
Alphabet is unique because it controls both the largest general web search engine (Google) and the largest video search engine, YouTube. And it's more than just a video search engine. YouTube is a social media platform, streaming site, and highly targeted ad platform rolled into one.
YouTube's utility makes it the second-most-visited website on the planet, behind Google itself. And according to data from internet data aggregator Similarweb.com, its average visit duration of 21:47 minutes is more than double that of Netflix, which only boasts 8:34 minutes. Both companies benefit from the trend of consumers transitioning from television to online media. But they monetize these eyeballs in different ways. While Netflix buys or produces its content and sells subscriptions, YouTube is largely free -- with most of its content generated by independent creators.
YouTube's user-generated content strategy and the celebrity status of its most popular creators may give it a stronger economic moat than Netflix, which is seeing its business challenged by very similar rivals like Disney+ and Warner Bros. Discovery's HBO Max, which replicate its business model. And while YouTube faces challenges from short-form video platforms such as ByteDance's TikTok, its long-form content makes it very differentiated and a key factor in Alphabet's long-term success.
