Alphabet's (GOOGL 0.78%) (GOOG 0.53%) stock has been a big winner in 2023. Its gain has been better than those produced by the S&P 500 and the Nasdaq Composite index. This is welcome news following a huge decline in 2022.
This might lead some investors, particularly those who have been on the sidelines, to think that it's too late to buy this FAANG stock. It's easy to question where the market-beating returns will come from with a business that has a market cap of $1.7 trillion.
But I think now is a wonderful time to buy Alphabet stock. Here are some compelling reasons why.
Industry resurgence
When the Federal Reserve started to aggressively hike interest rates last year, many analysts, investors, and economists were sure that a recession was imminent. And this caused executives to pare back their marketing expenditures. After all, why spend valuable cash on advertising if consumer confidence was taking a dip?
Alphabet experienced this pessimistic tone firsthand. Revenue in 2022 increased by just 9.8%. That's a huge slowdown from the 41.2% sales gain in 2021.
However, things have been picking up more recently, which might signal that macro headwinds are a thing of the past. Revenue jumped 11% in the most recent quarter. This marked the third straight three-month period that sales growth accelerated.
Because this company generated 78% of its third-quarter revenue from digital advertising, it's obviously overly exposed to whatever happens in the industry.
With inflation showing signs of cooling down, and some experts believing that a recession is no longer a sure thing, the market for digital advertising is likely to continue picking up steam. And this would benefit Alphabet, the leader in the industry, tremendously.
NASDAQ: GOOGL
Key Data Points
Underrated assets
Besides the popular Google Search, which has a monopoly position in the market, Alphabet possesses some other attractive assets that can drive bullish sentiment from investors.
There's YouTube, the user-generated video streaming platform that was acquired for $1.7 billion in 2006. YouTube generated nearly $8 billion in ad revenue in the last quarter. And it has more than 2 billion users. These figures support the argument that YouTube might be one of the best acquisitions in the history of corporate America.
Alphabet also owns Waymo, its self-driving automotive segment. Waymo is a leader when it comes to autonomous technology, which could prove to be a huge revenue driver in the future.
It's hard to overstate Alphabet's ability to collect massive amounts of data that the company uses to successfully improve the services for its customers and users. Waymo can adopt this same playbook by analyzing the data it gets from the cars using its technology.
Over time, Waymo's software could come pre-installed in vehicles all over the country and world. And this would give Alphabet a potentially high-margin source of revenue in a large end market that further entrenches the business in the daily lives of people.
Reasonable valuation
Even though Alphabet shares have crushed the market this year, they aren't expensive. They trade at a forward price-to-earnings ratio of under 24, a valuation that isn't asking too much of investors.
Alphabet's financial performance speaks for itself, more than justifying the current P/E multiple.
In the last few years, the company's revenue and diluted earnings per share (EPS) have soared. And between 2022 and 2025, Wall Street analysts estimate that Alphabet's revenue and diluted EPS will rise at compound annual rates of 10% and 18%, respectively.
It's best not to overthink things, and instead, focus on keeping it simple. This is one of the best businesses in the world. And the valuation is compelling. Adding the stock to your portfolio is the smart move.
