Google's parent company, Alphabet (GOOG 1.16%) (GOOGL 1.32%), has faced a lot of questions lately, largely because of the emergence of artificial intelligence (AI) tools such as chatbot ChatGPT, more regulatory scrutiny, and a slowdown in digital ad spending. While it's still a top tech titan with its hands in many areas, investors seem more pessimistic about the stock than they are about other Big Tech companies.
Alphabet is up more than 9% in the past 12 months but still lags behind comparable companies and the overall S&P 500.
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Alphabet is a good investment, but being a good investment doesn't mean it's always a good time to be investing in the company. So even though Alphabet is a long-term buy, is it a buy right now? Let's see.
Alphabet's ongoing battle with E.U. regulators
For more than a decade now, Alphabet has been in ongoing legal battles with European Union (E.U.) regulators over the breaching of antitrust laws.
In June 2017, the E.U. hit Alphabet with a $3.5 billion fine regarding its shopping service; in September 2022, the E.U. hit Alphabet with a fine of more than $6.1 billion; and just a couple of weeks ago, the European Commission alerted Alphabet that it breached E.U. antitrust rules by "distorting competition" in the advertising technology (adtech) industry.
Given this history, the E.U. is likely to impose another steep penalty. Bloomberg reported it could exceed $8 billion.
More important than the financial hit is the prospect that Alphabet may have to restructure and divest some of its adtech business to continue operating in countries in the E.U. This isn't a small hurdle, as Europe, the Middle East, and Africa (EMEA) account for 30% of Alphabet's revenue.
Becoming less reliant on Google advertising
Google's advertising business is vital to Alphabet's success. Google advertising brought in $54.5 billion of Alphabet's $69.7 billion in Q1 2023 revenue and accounted for more than three-quarters of its fiscal 2022 revenue. As Google advertising goes, so does Alphabet's bottom line.
Although Alphabet's Q1 revenue was up 2.6% year over year, it was down 8.2% from Q4 2022, and Google advertising revenue was down for a consecutive quarter.
Alphabet isn't oblivious to the potential threats of a weakened advertising business, so it has prioritized diversifying its revenue streams, particularly with Google Services and Google Cloud, which both continue to grow. Google Cloud revenue was $7.4 billion in Q1, up from $5.8 billion in Q1 2022, and it was finally profitable.
If Alphabet wants longevity, it will have to become more reliant on segments outside of Google advertising. That will probably mean doubling down on Cloud, which the company seems willing to do. It still lags behind Amazon Web Services and Microsoft's Azure in market share, but becoming profitable should be an encouraging sign to investors.
Long-term potential, short-term problems
Back to the original question: Is Alphabet a buy right now? For long-term investors with time on their side, I believe the answer is yes. Alphabet has the resources to weather the storms it has coming its way. I believe concerns about Google search are legitimate, but overhyped nonetheless. Alphabet may not be able to use it as a crutch as it has in the past, but it'll be its bread and butter for the foreseeable future.
The answer to the question gets more complicated for investors concerned about how the stock price will perform in the short term. Overall, tech hype has lifted the stock price by more than 35% year to date, as of June 23, but a pullback could be well on its way -- not just for Alphabet, but for the tech industry in general.
Now could be a good time to dollar-cost average your way into a stake in the company.
