All eyes have been on tech this year, with advances in sectors like artificial intelligence (AI) and cloud computing making Wall Street particularly bullish. Alphabet (GOOG -3.33%) (GOOGL -3.37%) has growing positions in both of these industries. Meanwhile, its command of the consumer market with potent products like Google and YouTube could give it a boost in AI over the long term.
Alphabet stumbled last year as an economic downturn curbed digital ad spending. However, its ad revenue has enjoyed a gradual recovery in 2023 alongside easing inflation. The company has a solid long-term outlook and trades at a better price than most of its peers. It's an excellent time to learn more about this tech giant before its stock rises any higher.
So, here are three things about Alphabet that smart investors know.
1. It's vulnerable to macro factors
Inflation hit a high of 9% last June. Spikes in the cost of living and interest rates led countless businesses to slash budgets, with advertising one of the first things to go. As the biggest name in digital ads, Alphabet suffered the brunt of market declines.
In the fourth quarter of 2022, Google's advertising revenue fell 4% year over year after slips in YouTube and Search earnings. Over 80% of Alphabet's revenue regularly comes from its advertising segments, with last year's macroeconomic headwinds proving the the vulnerability of its business.
Prospective investors should be aware that Alphabet's revenue growth in any given year largely depends on the state of the economy. Its business is cyclical, and holding the stock during uncertain conditions will be crucial to benefit from its inevitable recovery.
Alphabet's stock plunged 39% last year as it faced macroeconomic hurdles. However, those who sold last year would not have profited from the 52% rise that the shares have delivered since Jan. 1.
2. It has a long-term edge in AI
In May, Alphabet revealed it currently has "15 Google products that each serve more than half a billion people and businesses. And six of those serve over 2 billion users each." These figures represent the company's immense presence in the world, with billions of users depending on its services.
Brands such as YouTube, Google, and Android have made it difficult for most people to go a single day without using an Alphabet product. The company is a behemoth in the tech industry and could use its popular platforms to carve out a lucrative position in AI over the long term.
Earlier this year, the company unveiled a service it calls "Duet for Workspace," which has brought generative AI upgrades to Google Docs, Sheets, Gmail, and more. Meanwhile, Alphabet's key focus is to improve its Google search engine with AI. The direction is promising, considering the platform earned $162 billion in revenue last year and is responsible for over 80% of the market.
Google appeared under threat at the start of 2023 when OpenAI's technology was applied to Microsoft's Bing. However, Alphabet's dominance in search engines will be difficult to overcome, with consumer loyalty potentially proving a major asset.
3. It's trading at a bargain vs. the competition
Alphabet has been somewhat overlooked this year, with investors favoring companies such as Microsoft and Amazon when it comes to AI. However, the Google company's financials make it an attractive option. In Q2 2023, Alphabet's operating margin hit an impressive 29%, with $22 billion in free cash flow. Meanwhile, the company's $118 billion in cash or cash equivalents alongside $14 billion in long-term debt bodes well for its future.
Data by YCharts
Moreover, the chart above shows Alphabet's solid earnings have made it the best-valued stock out of the five biggest tech companies. Alphabet's price-to-earnings ratio of 28 is the lowest among these companies, making it an excellent option for investing in tech.
Alphabet had a challenging 2022, but its stock is a compelling buy as its ad business recovers and it gradually expands in AI.
