Alphabet (NASDAQ:GOOG) stock has taken a hit recently. Currently, shares of the large technology company can be purchased for around $125, more than 10% less than the level at which they were trading in mid-October.
Here I’m going to discuss why I think investors should consider buying the dip. Let’s dive in.
Big drop in stock price
Alphabet released its third quarter earnings last month and overall, in my opinion, they were solid.
For the quarter, revenue totaled $76.7 billion, up 11% year over year, helped by the strength of the digital advertising market.
Meanwhile, diluted earnings per share amounted to $1.55 versus $1.06 a year earlier (+46%).
Both revenue and earnings were above analyst estimates.
What spooked investors, however, was the growth of the company’s cloud computing division.
For the third quarter, cloud revenue was $8.41 billion versus the forecast of $8.64 billion.
And cloud growth of 22% was well below last year’s third quarter figure (38%).
Now, this slowdown in growth is a bit disappointing.
However, I think the share price drop here is overblown. A drop of more than 10% due to a failure on the cloud side of the business seems a little crazy to me.
Lots of growth ahead
Looking ahead, I expect Alphabet to continue delivering strong revenue and earnings growth.
Recently, there has been talk that ChatGPT could kill your search business.
However, I just don’t see that happening.
In short, ChatGPT and Google are two different things.
ChatGPT is great for finding an answer to a question. Or write a generic blog or email.
However, it’s pretty useless when it comes to many other things.
For example, if I wanted to research and buy a new laptop, it can’t really help me, while Google can.
Similarly, if I were looking for the best stocks to buy, Google would be much more useful to me than ChatGPT, because the former would point me to trustworthy sites like The Motley Fool.
Therefore, I believe Alphabet is well positioned to continue generating growth in the digital advertising space.
The growth of its YouTube platform should help. Today, YouTube is one of the most dominant entertainment platforms on the planet.
A leader in ai
Of course, artificial intelligence (ai) also presents a huge long-term opportunity for Alphabet.
Recently, the company has been rolling out powerful ai features into apps like Drive, Docs, and Maps.
And shortly, it is about to launch Gemini, its next-generation ai core model designed to compete with ChatGPT-4.
Alphabet also just invested an additional $2 billion in artificial intelligence startup Anthropic. So it’s clearly getting serious about ai.
Add in the growth of cloud computing and “other bets” like its Waymo self-driving cars, and I think there’s a lot to be excited about here.
And this growth is available at a reasonable price.
Currently, Alphabet’s forward P/E ratio is just 19, using the 2024 earnings forecast.
I see a lot of value in that earnings multiple.
Attractive risk/reward setup
Now, there are risks here too, of course.
Competition of microsoft and other technology companies is obviously a huge risk. If Alphabet doesn’t innovate, it may lose market share in search and cloud.
Government intervention and litigation are two other factors to consider. These could affect profits.
However, overall, I find the risk/reward proposition attractive.
I think now is the time to consider buying shares.