Alphabet's (GOOG +0.50%) (GOOGL +0.60%) stock has tumbled 27% over the past year as investors have opted for lower-risk, slower-growth investments in the wake of rising inflation and a potential recession. Disappointing financial results in the fourth quarter also contributed to Alphabet's recent share price decline.
With Alphabet's stock down significantly over the past year, some investors are wondering if the tech giant is a good buy right now. I think it is and there are three reasons why.
Image source: Getty Images.
Alphabet's AI opportunity
Yes, Alphabet did a poor job of showing off its artificial intelligence (AI) capabilities at its most recent event. Alphabet's Google debuted its Bard AI chatbot -- a competitor to a recently revamped Bing browser that integrates OpenAI's ChatGPT -- made an incorrect statement about the James Webb Telescope capturing the first image of an exoplanet. In fact, that happened back in 2004, about two decades before the Webb telescope.
While it was a clear stumble and proof that no company is a sure bet in the AI race, it's worth remembering that the stumble in no way means Alphabet won't benefit from the massive $1.4 trillion AI market (by 2029).
Microsoft -- which was an early investor in OpenAI and is integrating ChatGPT into its Bing Search and its Edge browser -- will certainly give Alphabet competition. Still, it hasn't had a perfect rollout either. For example, Bing's new conversational AI tool has given incorrect information, threatened users, and ignored basic prompts over the past couple of weeks.
Alphabet has an 84% market share in online search right now and Microsoft is in a very distant second with just 9%. Not only would it likely take a long time to wrestle that huge search lead out of Alphabet's grasp, but it's also very early in the AI search competition. This means that even if ChatGPT continually improves, AI search is still anyone's game at this point.
NASDAQ: GOOGL
Key Data Points
The ad market isn't going anywhere
Some investors got worried when they saw the company's "Google Search and Other" revenue segment experienced a 2% slowdown in sales in the fourth quarter. Additionally, the company's YouTube ad sales fell 8% to $7.9 billion over the period.
It's not great to see that drop, of course, but it should be put into context. First, advertisers have unsurprisingly been a bit nervous right now as inflation has grown and some economists have warned of a potential recession on the horizon.
So the current pullback in spending is for a very specific reason and there's historical data showing that when advertisers pump the brakes, they often hit the gas afterward. The digital ad market bounced back quickly in the quarters following the Great Recession, even as the economy was still struggling.
Additionally, the digital advertising market is poised to experience significant growth in the coming years. The latest report from Insider Intelligence estimates the digital ad market will reach $696 billion in 2024 -- up 23% from last year.
So while Alphabet's ad sales hit a speed bump in the third quarter, there's little reason to worry that the trend will continue into the future.
The stock is a little cheaper right now
And lastly, Alphabet's share price decline has made the company's price-to-earnings ratio of 20 far less expensive than its P/E ratio of 35 two years ago and cheaper than the tech sector's trailing P/E ratio of 43.
Long-term investors should keep in mind that tech stocks could remain a bit volatile in the short term as investors try to figure out what's happening with inflation and the economy. But with its digital ad future still firmly intact and AI offering a lot of untapped potential, I think Alphabet is still a good bet over the long term.
