Economic uncertainty over rapid Federal Reserve rate increases, record inflation, the persistence of COVID-19, and geopolitical conflict have roiled the stock market in ways not seen since the Great Recession. As a result, many investors may wonder whether any company is worth investing in during these bleak times.
Here are a few reasons why Alphabet (GOOGL -1.11%) (GOOG -1.16%) is one of the best companies to invest in during the current market environment.
Alphabet's business is resilient
Recently, Snap disappointed the market with a terrible earnings report that showed a severe decline in growth, which the company attributed to macroeconomic headwinds and Apple's privacy policy changes, which hurt Snap's ad business. As a result of Snap's commentary, many online advertising stocks, including Alphabet, dropped due to fears over slowing advertising growth and the impact of Apple's ID changes.
However, Alphabet has a far more resilient business than Snap and many other social media companies.
First, while advertising demand can retreat in an economic slowdown, many advertisers have learned from previous recessions that pulling the plug on the ad budget can be detrimental in the long term. Therefore, many companies will continue to advertise but focus on advertising that generates the highest return on investment (ROI) -- a scenario that favors Google's Paid Search advertising segment, as very few advertising methods have as high an ROI.
For instance, Google has estimated that its ads generate an average of $2 in revenue for every $1 spent. Those returns for its customers are why Search today generates 58% of Alphabet's revenues.
Second, Paid Search has largely been immune to Apple's privacy policy changes that have significantly hurt revenues for ad companies like Snap, Meta Platforms, and other ad companies dependent on third-party tracking. Search instead relies on keyword bidding and is based on user intent -- a far more sturdy business model.
Strong balance sheet and free cash flow
One of Alphabet's most significant advantages is that it has far more resources to invest in this down cycle than most of its competitors.
Alphabet's second-quarter balance sheet shows it has $125 billion of cash and short-term investments. This cash is more than enough to pay off $61.35 billion of liabilities due over the next year, as well as $14.73 billion in long-term debt, and still leave enough for it to invest heavily in its strategic initiatives.
In addition, Alphabet generated free cash flow (FCF) of $27.91 billion in its latest quarter -- additional money the company can use to reinvest in its business. In its second quarter of 2022 earnings call, Alphabet CEO Sundar Pichai said the company intends to spend cash on long-term, high-value opportunities like AI, Search, and Cloud.
Companies with good balance sheets and strong FCF can often establish significant leads in key markets the longer a recession lasts by out-investing competitors that are retrenching in response to economic difficulties.
Alphabet plans to continue hiring
Many of Alphabet's existing and potential competitors have already started laying off workers. A few examples are Shopify, Meta Platforms, Unity Software, and Netflix.
While Alphabet plans to slow hiring, Pichai also said on its latest earnings call that the company will continue to hire engineering, technical, and other critical roles. During a recession, companies with the resources to continue hiring can often pick up good talent from companies that lay off personnel to cut costs. In addition, because of a shortage of computer scientists, artificial intelligence experts, and hardware engineers, any key hires made during this downturn could become a significant advantage post-recession.
Is Alphabet a good buy?
While Alphabet is resistant to a poor macroeconomic environment, it is not immune. As we move forward, there is a chance that worldwide economic conditions could substantially worsen, and even Google's Paid Search franchise might not hold up.
However, the company's current valuation already factors in the risk of further decline in economic conditions. As a result, Alphabet currently has a PEG ratio of 0.77, close to a historic low. Additionally, most investors believe a PEG ratio under 1.0 indicates an undervalued stock.
Therefore, if you are an investor looking for an investment that will likely survive and thrive coming out of a down market, there are few stocks better than Alphabet.
