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the fall in Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) stock has been a blessing in disguise for me. Its decade-low price-earnings (P/E) ratio has allowed me to dollar cost average and get stocks cheap.
Here’s why I plan to buy more before the company reports its earnings in early February.
toothless 2022
Alphabet stock has been known for its strong and steady growth over the past decade. However, 2022 bucked this trend and caused the stock to drop 40%. Although this performance is not as bad as other members of the FAANG group like Goal Y Netflix, it’s worth noting that the conglomerate missed earnings estimates for three straight quarters last year. It remains to be seen if he’ll complete a miss-out home run next week.
A combination of sky-high inflation, rising interest rates and the conflict between Russia and Ukraine have put pressure on companies to cut costs. And during economic downturns, advertising is often the first to go. So it’s no surprise that we’ve seen Alphabet’s top and bottom results suffer.
In addition, other revenue streams were severely affected. TikTok continued to gain market share from YouTube while the platform’s Shorts feature cannibalized its own ad revenue. This led to a decline in revenue in YouTube’s third quarter figures.
Combine this with higher labor costs, higher headcount and the group’s Other Gambling segment losing the most money, and it’s easy to see why investor sentiment soured.
spelling out the numbers
Consequently, analysts spent 2022 lowering their earnings estimates for the stock. The consensus for Alphabet’s fourth-quarter numbers doesn’t paint a pretty picture. In addition to the growing cloud platform, Google’s business divisions are projected to see miniature growth and even declines.
| Metrics | Q4 2022 (Agreement) | Q4 2021 | projected growth |
|---|---|---|---|
| total revenue | $76.65 billion | $75.33 billion | 1.6% |
| Earnings Per Share (EPS) | $1.21 | $1.53 | -21.6% |
| search income | $43.3 billion | $43.3 billion | 0% |
| YouTube revenue | $8.20 billion | 8.63 billion dollars | -5.0% |
| Google cloud revenue | $7.4 billion | $5.54 billion | 33.6% |
However, there is a silver lining to all the pessimism: Stocks tend to bottom out before earnings estimates do. With analysts projecting EPS to bottom out in the second quarter of this year, the bottom for Alphabet stock could be here. After all, its share price is already up 15% from its low point in November.
Furthermore, there are several indications that the tech giant could end up beating analyst estimates this time around. On the one hand, the slower recruiting in the fourth quarter should ease the downward pressure on his bottom line. Second, the development of Shorts monetization could bring ad dollars to YouTube. Most importantly, I would say, the bearish trend in the stock has been overdone, and any upside surprise in the company’s earnings could send Alphabet’s share price higher next Thursday.
A safer bet than to wait?
All this said, there is no guarantee that my predictions will come true. Alphabet shares could very well end up going lower again. However, I am not interested in timing the market. I am invested for the long term and will continue on dollar cost averaging if the stock goes down. This is especially the case when their forward valuation multiples are at decade lows.
| Metrics | valuation multiples | industrial average |
|---|---|---|
| Forward price-earnings (P/E) ratio | 18.6 | 28.9 |
| Price/Forward Sales (P/S) Ratio | 4.1 | 4.6 |
| Forward business value to EBITDA | 9.8 | 12.8 |
| Price to earnings growth (PEG) ratio | 1.1 | 2.5 |
Plus, Alphabet’s balance sheet is pristine, which means I don’t have to worry about my position being diluted or its earning potential being hampered by debt payments. and with people like jefferies, cow, Goldman Sachsand many more advocating a strong buy with a $126 average price target, I see no reason not to continue to increase my stake in Alphabet.
