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Between an earnings miss and a market unfavorable to tech stocks, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) has lost its edge. This could continue to be the case for GOOG stock in the near term. External worries about the economy, along with concerns about the tech giant’s future growth, could continue to affect its performance.
With this in mind, I wouldn’t buy into Alphabet today in anticipation of a quick turnaround.
However, if you are looking at this as a potential long-term position, buying this high-quality tech stock today is worth it.
Pushed to a low valuation due to all the uncertainty, its current price is a great entry point. Although it may take time, shares in the Google parent could pay off for investors willing to wait for a comeback.
GOOG Stock Can Stage a Comeback From Poor Earnings
With a heavy weighting in major indices like the S&P 500 and Nasdaq 100, it is no surprise GOOG stock has struggled amid a broader selloff. However, the company’s own poor quarterly results added a specific reason for a change in investor sentiment.
GOOG stock dropped after its first-quarter earnings release, due to both a revenue and earnings miss. Although its top- and bottom-line numbers were up significantly year over year, the market expected it to meet or beat expectations.
Its disappointing quarterly numbers also have raised doubts about Alphabet’s future growth. Analysts have already walked back their 2022 and 2023 earnings forecasts. Put it all together, it’s clear why Alphabet, which for a long time has traded at a valuation above 25x earnings, today sports a price-earnings (P/E) ratio in the high-teens.
Again though, if you are looking at it as a long-term holding, this uncertainty may mean opportunity. Already priced for further disappointment, when today’s issues dissipate, and if growth reaccelerates, a comeback seems likely.
YouTube, Cloud Computing Could Drive Growth
Even as it’s dropped sharply in recent months, it is possible GOOG stock has yet to bottom out. Another broad market pullback could result in it hitting another 52-week low. Its next earnings report will also play a big role in its performance in the months ahead.
But if you have an investing time horizon measured in years rather than months or quarters, a further slide may not be a deal breaker.
In the event there’s an economic slowdown, the company will be able to ride it out. Weakness in the digital ad market will come and go. Alongside this, the company has ways it can kick revenue and earnings growth back into high gear.
For instance, as InvestorPlace contributor Alex Sirois recently discussed, Alphabet has big potential to monetize the shorts feature on its YouTube platform.
Its cloud computing unit could also continue to perform strongly. Cloud’s performance last quarter was a key bright sport in the above-mentioned earnings report. Its cloud revenue came in at $5.82 billion, beating estimates for $5.76 billion. Moving more of its “Other Bets” into the monetization stage also stands to move the needle in the coming years.
The Bottom Line on Alphabet
Present challenges could continue to affect its near-term performance. It’s also not guaranteed that earnings growth will speed back up.
Yet these uncertainties work in your favor. With little exciting investors right now, the stock has fallen to a price that’s fairly cheap when you consider its quality and prospects. Arguably a blue-chip stock with high margins, a strong balance sheet, and a deep economic moat, buying it at 19.3x earnings is more than a fair price to pay.
The fact it’s now at a reasonable price may also limit its further short-term downside. Once it moves past its headwinds, and assuming that earnings start to rise again, over the next few years, GOOG stock could deliver a solid return.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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