Tech giant Alphabet (GOOG -4.50%) (GOOGL -4.44%) experienced a depressed stock price over the past several weeks on the back of a disappointing third-quarter earnings report. In fact, shares reached a 52-week low in November. Its Q3 advertising sales grew a modest 2.5% year over year, compared to 43% growth in 2021.
Worse, its YouTube division experienced its first year-over-year advertising revenue decline -- 2% -- since Alphabet first broke out the segment in 2019. Given the weak results, it's understandable that investors feel skittish about Alphabet stock.
But those looking for a long-term investment will find compelling reasons to buy now that Alphabet's price is well off its 52-week high of $151.55. Even Alphabet's beleaguered YouTube segment possesses rationale for a revenue comeback.
Here's why it makes sense to take advantage of Alphabet's depressed stock price to scoop up shares.
What happened to YouTube?
Let's first examine what happened to YouTube revenue. In Q3, its ad revenue fell 2% from $7.2 billion in 2021 to $7.07 billion this year.
YouTube's revenue decline was a result of the advertising industry suffering a spending slowdown over the past few months due to macroeconomic factors. For instance, the financial services sector reduced ad spending in area s such as mortgages amid rising interest rates.
This pullback added to the fact that last year was a strong one for digital ad spending, as the coronavirus pandemic caused a spike in people spending more time online. This makes Alphabet's 2021 revenue performance hard to beat, especially as consumers this year are gradually returning to pre-pandemic behavior.
Moreover, YouTube now has more competition for ad dollars as Netflix, Disney, and other streaming services have added advertising-driven subscription options to their offerings. But YouTube is taking action to grow income.
YouTube is poised to bounce back
YouTube offers its own subscription service to generate revenue, and it's doing well. According to CFO Ruth Porat, "Subscriber growth in YouTube Music Premium and YouTube TV continued to drive ongoing strong growth in YouTube non-advertising revenues."
In fact, users are increasing their time spent with YouTube. In 2020, YouTube users averaged 28 minutes per day on the service, while this year, time spent increased to 31 minutes. This far exceeds Hulu's 23 minutes per day, and is closing in on Netflix's 33 minutes. In fact, YouTube is forecasted to capture the most U.S. viewers among over-the-top TV services this year with 231.5 million viewers, exceeding Netflix's 169.3 million.
YouTube's advertising income will bounce back once the ad industry recovers from the current uncertain macroeconomic environment. That's because advertisers will continue to spend on digital advertising as a key means to reach consumers. Global digital ad spending is projected to rise from $521 billion last year to $876 billion by 2026.
And YouTube has yet to monetize its new Shorts format, its answer to rival TikTok. YouTube is tackling this format in an innovative way by offering a revenue-sharing model with video creators to spur content creation.
Moreover, YouTube is actively courting advertisers. The service introduced a new feature in November designed to increase an advertiser's return on investment (ROI) by capping the number of times the same ad shows to users.
If repetitiveness is reduced, viewers are less likely to become annoyed at the brand. YouTube's own studies showed advertisers achieved their marketing goals at a lower cost using the new capability. The combination of higher ROI and massive reach will allow YouTube to attract advertisers.
Alphabet beyond YouTube
It's also helpful to view YouTube's disappointing Q3 results in the context of Alphabet's larger business. Overall, Alphabet's Q3 revenue was up 6% year over year, a notable feat given the downturn in the advertising industry.
Alphabet's continued revenue growth was thanks to a 4% year-over-year increase in its resilient search engine advertising business, and near-38% growth in its cloud computing division, Google Cloud. Google Cloud shows such strong potential that it's another reason to invest in Alphabet.
In addition, the company continued to deliver massive free cash flow, generating $16.1 billion in Q3, and $63 billion over the trailing 12 months. Its Q3 balance sheet is spectacular, with $358.3 billion in total assets compared to $104.6 billion in total liabilities.
Alphabet's healthy financials are impressive. Add to that a rapidly rising business in the red-hot cloud computing industry, which is forecast to grow from $706.6 billion last year to $1.3 trillion by 2025, and Alphabet is well-positioned to bounce back once macroeconomic conditions improve. Given these factors, Alphabet stock is a solid buy.