Without a doubt, Alphabet (GOOGL 1.08%) (GOOG 1.06%) is one of the best businesses in the world. The tech giant has exposure to many fast-growing areas of the economy, and it often has leading products and services that customers absolutely love.
Shares have made for a wonderful investment, up 66% in the past three years, easily outpacing the broader Nasdaq Composite. Even through the first six months of 2023, shares climbed an impressive 36%. But is Alphabet stock a buy now? I think it is. Here's why.
Reasons to like the stock
One of the most obvious reasons to like Alphabet is its strong financial position. As of March 31, the company had $115 billion in cash, cash equivalents, and marketable securities on its balance sheet, providing it with incredible financial flexibility to weather any prolonged economic downturns. At the same time, Alphabet can continue to invest in new growth opportunities.
Alphabet also produces tons of free cash flow (FCF) to the tune of $60 billion in 2022. The leadership team hasn't shied away from using this cash to buy back shares, spending $59 billion to repurchase its own stock last year. During the first three months of this year, buybacks totaled $14.6 billion.
Then there are the network effects scattered throughout its business. As the top search engine, with a global 93% share of the market, Google Search is one of the most important internet platforms there is. It has three different user bases, including consumers searching for info, publishers putting their websites online, and advertisers looking to target an audience. All three of these groups find increasing value from Google as the number of other users grows. The platform simply becomes more valuable and useful as it gets bigger.
YouTube also benefits from network effects. If there are more content creators that post their videos on the service, viewers will have a much better experience. That's because there will be a huge content library to choose from. And those content creators will be able to reach an ever-expanding audience.
Plus, Google Cloud is continuing to increase revenue at a rapid clip. And it finally achieved its first operating profit in Q1. This has the potential to be a significant profit engine in the decade ahead.
Some negative factors
It's not all rainbows and unicorns, however. And there are unfavorable trends that investors should know about Alphabet. In 2022, the business generated 80% of its total revenue from advertising. Digital ads have helped make Alphabet the company it is today, but what we've learned in the past couple of years is that this market can be very cyclical.
And it makes sense why. Executives aren't going to want to spend big bucks on marketing when they believe that a recession is on the horizon due to a highly uncertain economic environment, and when they think that consumer spending will be under pressure. Alphabet's ad revenue in the first three months of 2023 showed a slight decline versus the prior-year period.
The business is also a top target among regulatory bodies, most notably in the European Union. Alphabet has been hit with billions of dollars in fines for various antitrust violations, mainly due to its monopolistic dominance when it comes to things like Android and its advertising technology.
The constant threat of government oversight as it relates to Alphabet's operations is something that shareholders have to get comfortable with. That's just par for the course for this company.
Consider the valuation
I wholeheartedly believe that Alphabet's positive traits outweigh the negative factors I just discussed. The company has been a target for regulators for a long time now, yet this scrutiny hasn't impacted growth. And it's very hard to imagine a scenario where Alphabet isn't a leader in AI, mainly because of its huge resources.
It's true that digital advertising has proven to be a cyclical market. But this is still Alphabet's bread-and-butter revenue driver. And the economy is in growth mode much more than it is contracting, so this will always benefit the business.
Therefore, the next step is to look closer at the valuation. As of this writing, Alphabet shares trade at a trailing price-to-earnings (P/E) ratio of 27.1, below its trailing five- and 10-year average valuations. I think that's a solid entry point for new investors to add this stock to their portfolios.
