There are times where Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) stock acts as a flight-to-safety trade.
Its strong financials attract investors when they are feeling skittish or worried. However, GOOG stock can only hold up so well when the proverbial crap is hitting the fan.
Take the Covid-19 selloff, for instance. The Nasdaq sold off roughly 33%, while Alphabet dipped 34%. During the most recent selloff, Alphabet fell 32.7% to the Nasdaq’s 31.9% dip. In both cases, Alphabet roughly tracked the index on the downside, it couldn’t outperform it. On the plus side, GOOG stock rallied 200% from the Covid lows vs. the Nasdaq’s 150% rally.
Where are we going with this?
During mild pullbacks, Alphabet may be a go-to. However, during the truly turbulent times, its staying power is compromised. That said, look at many of the high-flying growth stocks that are now down 70% to 80% or more.
Look at more than half of FAANG or even high-quality stocks like Advanced Micro Devices (NASDAQ:AMD) and Salesforce (NYSE:CRM), which have lost roughly 50% of their value.
When we look at Alphabet stock, shares are holding up to some degree because this is a great platform and a great business. The stock has only dipped 30% or more three times in the past 13 years — and two of them have been since 2020.
We’re in the midst of one such occasion right now, but the other two instances proved to be incredible opportunities for bulls. Will this one too?
3 Reasons to Buy Alphabet Stock
Alphabet didn’t amass a market capitalization north of $1 trillion by accident. It has carefully built out one of the strongest businesses in the world. It owns the top two websites in the world with Google.com and YouTube.com.
Because of those two assets, its ad business has thrived, allowing it to pour resources into other businesses as well. Most notably, that’s the company’s cloud business, which competes with other heavyweights like Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT).
Analysts expect double-digit revenue growth in each of the next three years. Specifically, they expect 15% growth in 2022 and 2023. As for earnings, estimates call for flat growth this year, but that’s followed by almost 20% growth estimates in 2023.
Investors will surely bemoan this year’s profit growth forecast, but at some point, the other attributes have to offset that reality.
First, Alphabet stock trades at just under 20 times this year’s earnings estimate (and last year’s earnings). Second, free cash flow remains robust, with the company raking in ~$60 billion last year alone. Third, the balance sheet is robust, with $134 billion in cash and short-term investments.
Because of the company’s strong financial position, it recently initiated a $70 billion buyback plan.
Is the Valuation a Pro or Con?
When we look at consumer staples stocks, we see high price-to-earnings valuations. I’m talking about names like Clorox (NYSE:CLX), Procter & Gamble (NYSE:PG) and others with little growth. Then I see GOOG stock trading at sub-20 times earnings, despite a far more powerful financial position and solid growth.
Allow me to offer one explanation.
First, tech stocks are the ones getting crushed, so Alphabet and its peers are going to come under additional pressure. However, the better explanation is that high-quality consumer staples companies tend to have more resilient earnings.
What they lack in growth they make up for in steady profits. That steadiness — i.e. predictability — is worth a premium to investors during uncertain times. If we do fall into a recession, Alphabet’s top and bottom lines will come under further pressure, while companies like P&G and Clorox will likely weather the storm better.
I’m not advocating dumping GOOG stock here and piling into consumer staples. I’m simply offering a realistic explanation for Alphabet’s valuation and what it means compared to other opportunities.
Personally, I don’t mind scooping up GOOG stock at sub-20 times earnings. That’s particularly true given its long-term growth prospects and the simple reality that its assets and financial situation are almost impossible to ignore.
What the Charts Say for GOOG Stock
Source: Chart courtesy of TrendSpider
Once the stock broke below $2,500, it quickly flushed down to the $2,000 area. The latter is a clear layer of support, but don’t get complacent with it. This area is, at the very least, vulnerable to another test if the selling pressure continues.
If it fails, GOOG stock could see a flush down toward the $1,750 area. For regular investors, I like the dollar-cost average (DCA) approach to quality names like Alphabet. In other words, accumulating great businesses when the stocks are in duress.
On the upside, Alphabet may see a new uptrend form if it can avoid making a new low. That said, $2,500 is the key level to get through on the upside.
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Source: Investor Place