What happened
Shares of search and cloud giant Alphabet (GOOG -2.22%) (GOOGL -2.21%) were climbing higher Monday, up as much as 3% early in trading before settling into a 1.5% gain as of 2:52 p.m. ET.
Alphabet benefited from the same tailwinds boosting many growth tech stocks during the session, and also found favor with one Wall Street analyst, who called the tech powerhouse one of his favorite picks for 2023.
So what
Jefferies internet analyst Brent Thill picked Alphabet as one of his top picks for 2023 in a note on Monday, while reiterating his $125 price target on the stock. That would equate to a nearly 40% gain from current levels.
While Alphabet has avoided performing a mass layoff thus far in the past year -- unlike most of its fellow FAANG stocks -- Thill believes that the company will announce a series of layoffs sometime in 2023. Thill expects an announcement along those lines will light a fire under Alphabet's flailing stock, much as happened with other large tech stocks when they made similar moves.
Not only does Thill anticipate that Alphabet will act to cut its labor costs, he also is expecting a recovery in the digital ad market to begin at some point this year. "Ad budgets are the easiest to cut first in a slowing macro, but also the quickest to turn back on," he wrote.
Alphabet saw a material deceleration in its ad revenues in 2022's third quarter as high inflation and rapid interest rate hikes caused advertisers to pull back on their marketing spending. Growth in Alphabet's Search revenues slowed to just 4.3%, and its YouTube advertising revenue actually fell slightly. In addition, the strong dollar imposed a hit of about 5% on its overall revenue growth.
Yet there are reasons to hope that the tough macroeconomic environment is turning. Last week, Friday's jobs report showed some easing of wage pressures, and on Monday, the Fed released its monthly inflation expectations survey, which showed a 0.2 percentage point drop in one-year inflation expectations to 5% -- the survey's lowest reading since July 2021.
Lower inflation would enable the Federal Reserve to slow or halt the interest rate hikes that it has been implementing for the past year, and that would be a good thing for growth tech stocks like Alphabet. Moreover, the dollar dropped against other currencies Monday -- and over the past three months. A weaker dollar would also boost the value of Alphabet's substantial international revenues.
Now what
Miraculously, Alphabet trades at a rather pedestrian 18.5 times earnings, in line with the market, despite those earnings being depressed by losses in its cloud and "other bets" divisions, each of which likely has significant positive value.
I tend to agree with Thill that Alphabet could be one of the better-performing large-cap tech stocks in 2023, even if interest rates stay higher than they were in the pre-pandemic era. Alphabet has high profitability and the opportunity to cut its costs, so it may have some advantages over newer tech challengers that don't have as much profitability at this point. So whether the economy slows further and interest rates come down, or whether it remains stronger with higher interest rates, Alphabet's share price should do well off of its currently beaten-down level.
