Tech stocks experienced a massive plunge after Federal Reserve Chairman Jerome Powell told investors his priority was taming inflation. Indeed, that is bad news for stocks in the short term. To slow the pace of rising prices, Powell will likely continue to hike interest rates, reducing the availability of capital.
But such conditions should play into the hands of Alphabet (GOOGL 0.55%) (GOOG 0.74%). Google's parent company depends less on consumer spending than Apple or Amazon, and its business lines, financial position, and valuation should increase the appeal of its stock in more-challenging times.
Alphabet's business
You might not think of Alphabet as a recession-resistant business. It traditionally derived revenue from advertising on its search engine and YouTube video platform. With consumers presumably having less income available to spend, advertisers might not want to spend, either.
Nonetheless, market researcher Technavio forecasts the digital ad industry will grow at a compound annual rate of 11% through 2026, even as competition in online advertising rises. In the first half of 2022, Alphabet derived about $111 billion of its $138 billion revenue (81% of its total) from ads.
While ads remain dominant, Alphabet has become increasingly dependent on Google Cloud. Businesses turn to cloud services because they offer cost savings, allowing companies to better manage connectivity, security, deployments, and data. These added efficiencies will probably appeal to companies looking to save money in harder times.
Many enterprises have turned to Alphabet for such services. Synergy Research reported that cloud revenue grew 34% over the last year. Google Cloud claimed a 10% share of that market, lagging only Amazon at 33% and Microsoft at 22%.
Financial advantages
In the first half of 2022, Google Cloud generated $12 billion in revenue. While that is only 9% of Alphabet's revenue, the segment grew by 39% versus the same period in 2021. In comparison, Alphabet's overall revenue increased by 17%. Moreover, Google Cloud only made up 5% of revenue in 2019, a sign that it is slowly becoming a more crucial part of the company.
However, the financial metric that might best state the case for Alphabet is liquidity. Between cash equivalents and marketable securities, liquidity comes in at $125 billion. While that is down from $140 billion at the end of 2021, it leaves Alphabet with one of the strongest cash positions among public companies. Hence, even if the Fed maintains tight lending policies, Alphabet holds plenty of capital to operate and expand its business.
Alphabet's stock positioning
Despite these benefits, Alphabet has suffered disproportionately in the current environment. Over the last year, it has lost nearly one-fourth of its value. While it has not suffered to the degree of some growth tech stocks, it has underperformed the S&P 500.
Nonetheless, the decline might have made it one of the best FAANG stocks to own from a valuation perspective. Its price-to-earnings ratio now stands at 21x, even as Alphabet continues to register double-digit revenue growth.
Additionally, the earnings multiple comes in lower than that of cloud rivals Amazon and Microsoft, which trade at 26 times and 27 times earnings, respectively. Such a valuation advantage could give investors more reason to choose Alphabet over other mega-tech rivals.
GOOG PE ratio. Data by YCharts.
Consider Alphabet in a rising-rate environment
Alphabet appears well prepared to escape most of the difficulties that will soon challenge many tech companies. Online ad spending continues to hold up, and its largest emerging segment, Google Cloud, should stay resilient as businesses look to save money.
Moreover, its cash hoard makes it one of the safest companies to invest in during difficult times. When you combine these aspects with its low earnings multiple, the communication stock looks increasingly like a safe haven with continuing growth potential.
