It's almost a certainty that you use one of Alphabet's (GOOGL 0.59%) products or services daily. The tech giant has become so ingrained in our lives that its success over the years has probably been taken for granted by many investors. And while the stock has rewarded investors, it's currently 8% off its all-time high.
Is this an opportunity to buy one of the best businesses at a small discount to its peak price? Let's consider both the bear and bull arguments with this leading tech stock.
What the bears say
Perhaps the most immediate argument against adding Alphabet to your portfolio is the early popularity of Open AI's ChatGPT. This large language chatbot, which utilizes artificial intelligence (AI), has been integrated into Microsoft Bing's search engine. Naturally, some bears are arguing that this spells doom for Google Search, a service that has long dominated the market, because it could make Bing more popular.
Moreover, if a greater number of search queries are answered in a conversational manner, as opposed to presenting a bunch of links, there's less ad inventory for Alphabet to sell. This has the potential to negatively impact a crown jewel cash-generating segment for the business.
Like all of its big tech rivals, Alphabet appears to always be in regulators' crosshairs, whether here in the U.S. or abroad, mostly in Europe. Heavy fines have been paid in the past for various reasons, and even today the business is on trial with the Department of Justice over Google Search's monopolistic position. The outcome of this is uncertain, and it can be concerning for investors to constantly have to keep this risk in the back of their minds.
The fact that governmental agencies are Alphabet's biggest point of worry highlights just how successful the business has become, but it's hard to predict what these regulatory bodies will do to alter the competitive landscape. These moves could undermine Alphabet's leading position and end up hurting the company's financial performance.
A more pressing issue has been the dramatic slowdown in the digital advertising market. After posting revenue growth of 41% in 2021, Alphabet was only able to increase sales by less than 10% in 2022 and 5% in the first six months of this year. What's becoming clear is just how cyclical this industry really is. Because ad spending is easy to pare back in difficult economic times, Alphabet's business is always going to be exposed to macro factors.
NASDAQ: GOOGL
Key Data Points
What the bulls say
As I noted above, the fact that regulatory threats are one of Alphabet's biggest worries is indicative of how dominant this company has become. This is arguably one of the greatest businesses of all time. According to CEO Sundar Pichai, Alphabet has "fifteen products that each serve half a billion people, and six that serve over two billion each." Those ridiculous stats are hard to fully comprehend.
And financials prove the success. Alphabet's operating margin last quarter (Q2 2023 ended June 30) was a stellar 29%, and the company produced $22 billion of free cash flow. The balance sheet is pristine, with $118 billion of cash, cash equivalents, and marketable securities, compared to $14 billion of long-term debt.
Thanks to the presence of a wide economic moat, investors probably don't need to worry about Alphabet losing its leading position anytime soon. Network effects underpin this company's operations. As the internet continues growing with more data and users, Google Search's importance in organizing this burgeoning amount of information only becomes more apparent. And more usage attracts the dollars of advertisers. Consequently, it gets better as it gets larger.
Alphabet also has a huge data advantage that will only become more pronounced. Data helps the company better match targeted ads with the right audience. And collecting and analyzing data leads to continuous product improvements that drive greater customer utility, leading to even more data generation.
A final bull argument is that Alphabet will surely be a leader in the AI wars, if it isn't already. This new technology has already been an integral part of the internet company's operations for years, as it's used in apps like Gmail, Maps, and YouTube. And Pichai has positioned this to be an "AI-first" enterprise. With popular services that are used by so many customers, Alphabet benefits by already having offerings where it can immediately introduce AI initiatives. This should keep the business at the forefront of innovation.
