Shares of Alphabet (GOOG 0.37%) (GOOGL 0.35%) have fallen 40% from their all-time high, with the latest pullback being driven by fear about artificial intelligence.
The fear of disruption isn't unfounded given how quickly AI has grown. But that may be overlooking what a strong business Google is right now. And I think this could be a generational buying opportunity for an amazing business.
Image source: Getty Images.
Advertising is down
Before we get to the good news, the reality is that Alphabet's biggest moneymakers were actually down to end 2022. Fourth-quarter revenue in search fell 1.6% to $42.6 billion, YouTube revenue dropped 7.8% to $8.0 billion, and Google Network fell 8.9% to $8.5 billion. Some of the declines can be attributed to companies spending less on advertising, but the impact of Apple's (NASDAQ: AAPL) app tracking transparency (ATT) is also being felt.
On the positive side, Google Cloud revenue was up from $5.5 billion a year ago to $7.3 billion. That offset losses in the ad-supported businesses, but there is a fundamental weakness in ads right now.
So is a declining ad business a problem for Alphabet? It depends on how you view competition.
Competition is coming, sort of
Over the last few weeks, we've heard a lot about the looming disruption from ChatGPT, an AI-powered Microsoft (NASDAQ: MSFT) Bing, and other AI tools. Alphabet was so scared that it unveiled a product called Bard that definitely wasn't ready for prime time.
While these products are potential competitors, let's not race out and call Alphabet's business dead yet. Google is still the default search engine on the vast majority of smartphones and browsers today, and it's ingrained in how many of us work. On top of that, advertisers know how to use Google's tools and generate returns on their investments. It's not clear (yet) how AI models would be monetized by advertisers in a similar way.
Alphabet's moat is still enormous
It's hard to overstate just how good Alphabet's business moat is around its core search product. The company owns Android, where it can make Google the default search engine and Google Maps the default map. YouTube is arguably the most valuable business in streaming today. And let's not forget Gmail, Chrome, and the Google Play Store, which are all moats around the core search business.
It's easy to say that Google is weaker than it's been at any point in the last decade given the threat from AI, and that's probably right. But any disruptive forces coming for Google and Alphabet will have to navigate the company's moats and beat any response Google may already have waiting in the wings. That's a tall challenge for any company.
The price is right
The market's fear that Google will be disrupted has given us a buying opportunity we've never seen for Alphabet. The company trades for just 19.6 times free cash flow, and that's before accounting for the $114 billion in cash on the balance sheet.
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Alphabet stock is a better buy than I've seen in a long time. I think the current down environment for advertising is a short-term blip and the company will return to growth (albeit slower than in the past) in the next few years. Getting the stock for a price this cheap seals the deal.
