Alphabet's (GOOG -1.80%) (GOOGL -1.82%) 2022 is one that investors would rather forget. The stock is down 30% this year, but some recent news may spark a turnaround before 2023 arrives.
Both factors are out of Alphabet's control, but have a chance to affect how investors view the company's outlook significantly.
Could the Fed slow interest rate hikes?
Federal Reserve chairman Jerome Powell made headlines on Nov. 30 when he stated, "The time for moderating the pace of rate increases may come as soon as the December meeting." That was music to investors' ears, as lower rates are better for business. Plus, it also indicates that the Fed's metrics for judging how it is slowing the economy are trending in the right direction.
With lower interest rates comes a higher appetite for more "risky" investments, such as stocks. This bodes well for Alphabet, which has seen its valuation tumble from 28 times earnings to 20 times earnings over one year.
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Investors will learn more about the Fed's true decision during the Dec. 13 and 14 policy meeting; until then, any news will be speculation.
Still, investors should keep their cool, as Powell didn't say there would be rate hike pauses or cuts, just less drastic hikes. It still means rates will likely be higher in a month, further squeezing business. But, it does indicate that rate hikes may not be as extreme throughout 2023.
This is a positive catalyst for Alphabet's stock, but the next one will be even bigger.
GDP growth quells the fear of a recession
Although it isn't the official definition of a recession, many point to two quarters of consecutive negative GDP growth as a recessionary sign. That's what the U.S. economy did during the first and second quarters of this year, but the third quarter saw a turnaround, with GDP growing at a 2.9% year-over-year pace.
If this pattern continues into the fourth quarter and Q1 2023, businesses will likely be less worried about a slowdown and return to advertising. Why is that a big deal for Alphabet? Nearly 80% of its Q3 revenue came from advertising sources, and the growth of this segment slowed to a 2.6% rate. With an improved economic outlook, advertisers might return to spending big, especially during the home stretch of the holiday season.
Alphabet needs to maintain its revenue growth because its expenses have shot up this year.
Investors are still worried about Alphabet's internal costs
While rate hikes and GDP growth aren't anything Alphabet can control, it is affected by them. One item Alphabet can control is its internal expenses, which have been substantially rising. Compared to companywide revenue growth of 6% in Q3, operating expenses rose 18%. Many point to Alphabet's hiring spree as the root cause, with the company adding more than 36,000 workers over the past year.
This increase is a drag on earnings, which fell from $1.40 per share last year to $1.06 this year. However, even if the economy turns around, if Alphabet's expenses continue to rise like that, it won't matter.
But CEO Sundar Pichai is committed to making the company 20% more efficient. The company hasn't announced layoffs, unlike most tech companies.
Controlling expenses is a step in the right direction, and Alphabet's management team has an excellent track record, so I'm giving it the benefit of the doubt. Still, what happens in the subsequent few earnings releases will be quite telling, both from a macroeconomic and an internal controls standpoint.
Will any of these catalysts turn Alphabet's stock around before 2022 is up? I'd say yes because the stock is up 3% over the past two weeks. Additionally, if the Fed announces a minuscule rate hike at the December meeting, that could send stocks soaring.
However, I'm a long-term investor, and what happens in December isn't consequential to my bullish Alphabet stance. I think now represents a great time to take a position in Alphabet's stock because even if the Fed resumes high rate hikes or the GDP falls again, Alphabet's business is still best-in-class and will likely continue its strength long after these catalysts are just a memory.
