Alphabet (GOOGL 0.37%) (GOOG 0.32%) has had a banner year so far in 2023, riding the wave of a broad recovery among technology stocks. Shares of the search giant are up 35% so far this year, roughly five times the 7% gains of the S&P 500. This is in stark contrast to the stock's performance last year, when it lost more than 39%.
The other catalyst fueling its gains were the company's better-than-expected financial results, which suggested the beginnings of a recovery for the advertising market. This gave investors much-needed confidence that the macroeconomic headwinds that have weighed on Alphabet's stock might finally be easing.
What does this mean for investors who missed out on Alphabet's current rally? Should they buy now with the expectation of further gains, or avoid the stock due to the economic uncertainty that remains? Let's take a look.
Image source: Getty Images.
What's been weighing on Alphabet stock?
There's little question as to what's been driving the broader market over the past year or so: the economy. The broader market downturn was fueled by persistent inflation and rising interest rates. These conditions resulting in a commensurate decline in consumer discretionary spending, which in turn caused businesses to slash expenses.
Historically, one of the first items on the income statement to be cut is marketing, because advertising spending can be dialed back or ramped up on short notice without a significant impact on ongoing business operations.
This was evident in Alphabet's performance in 2022, as full-year revenue grew just 10%, down 75% from its impressive gains of 41% in 2021. As concerning as that is for investors, it's worth noting that this is merely a temporary situation. History shows that as the economy begins to recover, businesses will resume their traditional spending habits, and the demand for internet advertising will resume.
Google remains the worldwide leader in search, controlling a dominant 93% of the market. This in turn fuels its industry-leading position in digital advertising, representing roughly 30% of worldwide digital ad spending, according to marketing trade publication Digiday.
This suggests that Alphabet is well-positioned to rally when ad spending resumes.
What could drive Alphabet stock higher?
In addition to the coming rebound in the advertising market, there are other catalysts that could fuel Alphabet's stock rally.
The most obvious is cloud computing. In the 2022 fourth quarter, Google Cloud was the third-largest worldwide cloud infrastructure provider, but controlled just 10% of the market, behind Amazon Web Services with 32% and Microsoft Azure with 23%, according to a report by market analytics company Canalys.
Yet even as cloud spending slowed, Google Cloud was the fastest-growing of the three, with growth of 36%. For context, Azure and AWS grew 31% and 20%, respectively. The report noted that Google's "differentiated products and focused go-to-market strategy are helping to drive customer momentum." If Google Cloud can continue to increase its cloud share more quickly than its rivals, this could fuel additional growth.
There's also Alphabet's renewed focus on artificial intelligence (AI). Earlier this month, at the company's 2023 I/O developer conference, Google announced a laundry list of AI-driven products and features, reminding investors of the company's long history of leveraging the technology to fuel its growth.
Data by YCharts
How to approach Alphabet stock now
Alphabet is currently selling for roughly 27 times trailing earnings and 5 times trailing sales, so the stock isn't the screaming buy it's been over the past year. Still, while value investors might balk at its valuation, I'd suggest that's a reasonable price to pay for a company that's expected to return to double-digit revenue and earnings-per-share growth between now and 2024.
As I outlined above, Alphabet has a number of growth drivers that could spark on ongoing stock rally in the months and years to come. Seasoned investors well-suited to withstand a little volatility should consider buying Alphabet or adding to a position now, particularly given the company's strong history of growth and the long runway ahead.
