The big technology companies all reported their third-quarter earnings in the last week of October. Except for Apple -- which continues to put up phenomenal numbers -- all the tech giants reporting are trading down after posting disappointing results. Alphabet (GOOGL 1.33%) (GOOG 1.47%), the parent company of Google, YouTube, and Google Cloud, was no exception, with share prices down over 13% in the last few trading days. Investors are worried about slowing growth at YouTube and expenses rising faster than revenue, among other issues.
While there is clearly some short-term pressure on Alphabet's earnings, the business is still in a great spot right now. Here are three reasons to buy shares of Alphabet after this latest price drop.
1. Google has a firm grip on search engine domination
Even with the rise of YouTube and Google Cloud, the majority of Alphabet's business is still Google Search, its original moneymaker. Google Search generated $39.5 billion in revenue in the third quarter (57.2% of Alphabet's overall revenue). Year-over-year revenue growth was only 4.2% on a nominal basis, but it was likely much higher in constant currency terms because of the strength of the U.S. dollar this year, which will dampen the revenue Google earns outside of its home market.
Why is Google Search revenue still growing? It's simple: The service has a virtual monopoly on the search engine market and is riding the steady growth of internet users around the globe. According to third-party estimates, Google Search has a 90%-plus market share in a majority of countries (excluding China) around the world. Every year a few hundred million new people start using the internet, with existing users increasing the amount of time spent online. This means more of an opportunity for Google to serve advertisements as people search for information and products.
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No matter what people are searching for on the internet, the vast majority are doing so through Google Search, making a boatload of money for Alphabet in the process. Unless something drastic changes within the search engine market, Google's dominance should continue for the foreseeable future and lead to consistent topline growth.
2. Google Cloud's growth is on schedule
Outside of Google Search, the highlight of Alphabet's business over the last few quarters has been Google Cloud. One of the big three cloud infrastructure providers along with Amazon and Microsoft, Google Cloud's revenue grew 37.6% year over year in the third quarter to $6.9 billion. Annualizing this number, the segment has a $27.6 billion revenue run rate.
There's no reason to think this growth won't continue for many years. Through 2028, industry experts expect cloud spending to grow by 15% a year and reach over $1 trillion in annual spending by 2028. If Google Cloud's business grows by 15% a year for the next six years, the business will be doing $64 billion in annual revenue by 2028.
Right now, Google Cloud is not profitable, with an operating margin of negative 10%. However, this has been moving in the right direction over the last few years and should inflect higher over the next three to five years. Its competitor Amazon Web Services routinely puts up 30%-plus profit margins, and there's no reason to think Google Cloud won't get close to that once it stops investing so heavily for growth.
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3. Alphabet keeps making share repurchases
Alphabet may be investing in numerous new initiatives (Cloud, YouTube, and self-driving cars, just to name a few), but the company is still highly profitable. Last quarter it generated $16 billion in free cash flow, and it has generated $62.5 billion over the past 12 months. With all this cash, management is repurchasing shares of its stock, with over $15 billion completed last quarter alone. These can be highly accretive for shareholders, as the repurchases slowly reduce shares outstanding and juice growth in earnings per share (EPS) and free cash flow per share, which drive shareholder value over the long term.
GOOG Free Cash Flow data by YCharts
Right now Alphabet stock gives the company a market cap of $1.1 trillion. The stock is trading at a trailing price-to-free cash flow (P/FCF) ratio of 17.6, which is below the market's average earnings multiple. For a company with such a strong competitive position and multiple growth avenues (like Google Cloud), now looks like a great time to buy shares of Alphabet after this latest price drop.
