Long-term investing is the key to sustainable returns in the stock market because it ignores short-term volatility. But for investors, it's hard to know which companies can stand the test of time. Let's discuss three reasons why the diversified technology giant Alphabet (GOOG -1.10%) (GOOGL -1.23%) looks poised for decades of success.
1. Alphabet's advertising business is cyclical
Despite a 18% rally in 2023, Alphabet stock is still down by a whopping 30% from its all-time high of $150, reached in late 2021. Like many stay-at-home winners, the company has faced a slowdown in growth and margins as pandemic-era trends normalize. Cyclical macroeconomic headwinds like inflation and rising interest rates have compounded the problem.
First-quarter sales grew just 3% to $69.8 million, while operating income fell 13% to $17.4 billion. But while advertisers are cutting marketing budgets amid fears of a future recession, this is a predictable part of the business cycle that doesn't change Google's long-term economic moat, which comes from its 86% market share in desktop internet search.
Management is also taking advantage of the downturn to cut costs. In January, it announced plans to lay off 12,000 employees, and in April, CFO Ruth Porat promised to reduce spending on other types of overhead like real estate and employee services. These moves could help Alphabet emerge from this downturn leaner and more profitable than before.
2. AI is more of an opportunity than a threat
Some industry watchers see the rise of generative artificial intelligence (AI) platforms like ChatGPT as a threat to Alphabet's core Google search business. And while there will be some competition, the platform is well-differentiated enough to hold its own.
Image source: Getty Images.
Search engines allow users to interact with the internet directly instead of simply asking questions and getting answers in return. Google uses machine learning to optimize its results. And with decades of consumer search data to work with, it's hard to see a new rival beating it at its own game, especially with much less data to work with.
As the owner of the two most visited websites in the world (Google and YouTube), Alphabet's treasure trove of search behavior, user-generated videos, and comments gives it a valuable edge in the industry. Quality datasets are becoming more crucial as other large websites such as Reddit, Twitter, and Stack Overflow move to restrict free access to their data from AI companies looking to train their models.
3. The valuation is fantastic
For long-term investors, buying a quality company at a low valuation can help reduce risk and maximize returns. With a forward price-to-earnings (P/E) multiple of 19, Alphabet stock is substantially cheaper than the S&P 500 average of 24. And while the company is not growing very fast right now, investors should keep an eye on its resilient moat and long-term potential, especially as its advantages in AI begin to take shape.
