Where Will Alphabet Stock Be in 1 Year?

Alphabet's (GOOG 0.74%) (GOOGL 0.55%) stock declined about 16% over the past 12 months as investors fretted over the macroeconomic challenges to its core advertising business. Rising interest rates and a looming recession have also been weighing down the stock.

But if we tune out that near-term noise, Alphabet's stock looks historically cheap at 21 times forward earnings. It should continue to dominate the online search engine, digital advertising, streaming video, web browsing, and mobile operating system markets for the foreseeable future. While smaller than Amazon's (AMZN -1.64%) or Microsoft's (MSFT 0.37%), its cloud business may also keep growing.

Image source: Getty Images.

Therefore, selling Alphabet just because its advertising business faces a few tough quarters could be a mistake. Let's dive deeper to see where the tech giant's stock might be headed in a year.

How badly did Google's ad growth decelerate?

In the second quarter of 2022, Alphabet generated 81% of its revenue from Google's advertising business, which includes its core search engine, advertising network, and YouTube site.

The bears claim this business will struggle amid rising inflation and slower economic growth. Google's advertising growth has certainly cooled off over the past year, but it's still growing year over year (YOY).

Data source: Alphabet. Chart by author. YOY = year over year.

Within that segment, YouTube had initially been growing at a faster clip than Google's search and advertising businesses. However, YouTube's growth sputtered out in the first half of 2022 as it faced a tough comparison to the post-pandemic recovery in ad sales a year earlier.

Data source: Alphabet. Chart by author. YOY = year over year.

Will the cloud business pick up the slack?

When Google's advertising business decelerated during the onset of the pandemic in the first half of 2020, it relied heavily on the growth of Google Cloud -- which benefited from stay-at-home trends and the rising usage of cloud-based services -- to offset that slowdown.

Data source: Alphabet. Chart by author. YOY = year over year.

Google Cloud continues to grow at a faster rate than its advertising business, but it's also losing its momentum and hasn't been growing much faster than its larger peers. Amazon, which leads the cloud race with Amazon Web Services (AWS), grew its cloud revenues 33% YOY to $19.7 billion in its latest quarter. Microsoft's total cloud revenue, including its cloud platform Azure, rose 28% to $25 billion in its latest quarter.

That's worrisome because Google Cloud isn't profitable yet, and it will likely need to offer rock-bottom prices and aggressive promotions to keep pace with Amazon and Microsoft. Simply put, it's not a sturdy crutch for Google to lean on if its advertising business ever stalls out -- since generating a higher mix of cloud revenue would likely erode its total operating margins.

Can Alphabet fix all those problems in a year?

Alphabet expects its advertising business to continue facing difficult comparisons to the post-lockdown recovery throughout the rest of 2022. It also expects its cloud business to generate slower near-term growth as the macroeconomic headwinds cause some customers to either spend less money or postpone their purchases.

Alphabet didn't provide any exact guidance for the rest of the year, but during its latest conference call, CEO Sundar Pichai said the company would be "slowing our hiring and sharpening our focus." In other words, the company is bracing for a slowdown by trimming the fat -- but it still expects its total capex to increase in 2022.

Alphabet's revenue and earnings rose 41% and 91%, respectively, in 2021 as it bounced back from the pandemic. But this year, analysts expect its revenue to rise 13% as its earnings decline 8% against that challenging comparison. In 2023, they expect revenue and earnings to grow 12% and 16%, respectively -- assuming the current headwinds subside.

We should take those estimates with a grain of salt, but they indicate that Alphabet's slowdown will likely be temporary, and its core businesses will continue to grow. I don't think Alphabet's stock will soar over the next 12 months -- since it merely seems reasonably valued instead of undervalued at the moment -- but I believe it will definitely head higher over the next few years.