Last year was tough for investors, as the U.S. stock market suffered its worst annual performance since 2008. The drop was the result of macroeconomic factors, including high inflation and rising interest rates, weighing on the economy and souring investor sentiment toward industries such as the advertising sector. As a result, the ad industry experienced a downturn that continues into 2023.
Tech giant Alphabet (GOOGL 1.05%) (GOOG 1.11%) generates about 80% of its revenue from advertising and that souring sentiment led to a slowdown in revenue growth in 2022. This slowdown was a big part of why Alphabet stock hit a 52-week low of $83.34 last November.
2023 is a different story. A change in sentiment and some investing trends Alphabet has been drawn into helped shares begin a recovery that has so far pushed the price to climb north of $123, which is where it remains. For investors who didn't scoop up shares before the price surge, has the opportunity to buy Alphabet stock passed you by?
Not by a long shot. Several factors are in play that can help Alphabet's stock rise even higher. Let's look at why long-term investors still have a chance to gain big with Alphabet stock.
Alphabet benefits from an advertising rebound
Among the factors favoring Alphabet's fortunes is the digital advertising sector's eventual recovery from its current slowdown. Investors buying shares for the long run can benefit when that happens, but that recovery can take time to manifest.
For example, the advertising industry experienced its 10th straight month of declines in ad spending as of April. The impact to Alphabet was apparent in its first-quarter earnings results, where the company disclosed revenue of $69.8 billion, a 3% year-over-year increase compared to 23% growth in Q1 of 2022.
Growth in global digital ad spending is forecast to remain sluggish this year. Even so, this number is projected to reach $602 billion a year, an increase from 2022's $550 billion. Buy 2026, digital ad spending is expected to exceed $800 billion. This industry growth will serve as a tailwind for Alphabet, and the company is well-positioned to benefit.
Alphabet owns Google, the top-ranked search engine, and YouTube, the largest video platform in the world, with more monthly visitors than Amazon, Twitter, and Meta Platforms' Facebook and Instagram combined. Consequently, advertisers will devote a significant portion of their ad dollars to Alphabet as digital ad spending growth accelerates.
Alphabet's other growth engines
Ad industry growth isn't the only factor helping Alphabet. The company possesses a cloud computing business, Google Cloud, that has steadily expanded for years. Alphabet's cloud computing revenue was $7.5 billion in Q1, up 28% from the previous year's $5.8 billion.
| Time Period | Google Cloud Revenue | Growth (YOY) |
|---|---|---|
| Q1 2023 | $7.5 billion | 28% |
| FY 2022 | $26.3 billion | 37% |
| FY 2021 | $19.2 billion | 47% |
| FY 2020 | $13.1 billion | 46% |
| FY 2019 | $8.9 billion | 53% |
Data source: Alphabet. YOY = year over year. Chart by author.
Research firm Gartner estimates the public cloud sector, where Google Cloud operates, will see its market increase 20% this year to $597 billion, and will jump to nearly $725 billion in 2024. This will serve as another boost for Alphabet, particularly since Google Cloud is the world's third-largest cloud computing provider, and with 28% year-over-year revenue growth in Q1, is rising faster than the industry this year.
A third major tailwind helping Alphabet grow revenue is artificial intelligence (AI). Alphabet has used AI in its Google search engine for the past four years. And in May, the company launched the ability to create ads using AI.
Thanks to the company's AI advances announced at last month's I/O conference, Alphabet shares took off in May. That's because the global AI market is forecast to grow from $142 billion in 2022 to nearly $2 trillion by 2030.
Other reasons to invest in Alphabet
Industry growth in digital advertising, cloud computing, and AI are not the only reasons to consider a long-term investment in Alphabet.
The company possesses outstanding financials. Alphabet exited Q1 with a strong balance sheet of $369.5 billion in total assets, compared to $108.6 billion in total liabilities. It also had $115 billion in cash and marketable securities.
Moreover, Alphabet's Q1 free cash flow was a hefty $17 billion. Over the trailing 12 quarters, the company generated an astounding $62 billion in free cash flow.
Its excellent financial health, combined with growth potential in three large industries, make Alphabet a solid stock to own. While its share price may have risen this year, the company has enough elements in its favor to propel the stock higher. These factors help to make the stock a good long-term investment and tell the tale as to why it's not too late to buy Alphabet shares.
