Digital giant Alphabet (NASDAQ: GOOG) owns businesses from Google to YouTube. That sounds like a license to print money – and it is. Last year, for example, the firm earned well over a billion dollars a week on average. Despite that, Alphabet shares have been falling.
In fact, the shares have lost a quarter of their value over the past year. An underwhelming quarterly earnings report released yesterday could further hurt the shares. While revenues were 6% higher than in the same period last year, net income fell 26%.
Why I’d buy
Despite that, I see the current price of Alphabet shares as cheap.
The company has a business model that I think is world class. The costs of building a competitive platform would be very high. That alone acts as a barrier to entry for possible rivals. Alphabet’s businesses have a large installed user base. There would be a switching cost for them in terms of time and effort that might keep them loyal to Alphabet even if a rival offered an equivalent service.
Alphabet’s product ecosystem enables it to serve up ads without having to spend lots more money. Compare it to a traditional outdoor advertising firm. If such a business wanted to display more ads, it would need to own or rent more poster sites. Alphabet, by contrast, has a very small marginal cost when increasing the number of ads it displays online – meaning that it can make excellent profit margins.
Those characteristics add up to a profitable operation with a large opportunity in years to come and a massive captive market. I see that as a great business.
Alphabet shares look cheap
The key to successful investing, however, lies not only in buying into great businesses. I also need to build my stake at an attractive price.
The drop in Alphabet shares means that they now trade on a price-to-earnings ratio of just under 20. I see that as cheap for a business with the future earnings potential I believe Alphabet has. Admittedly earnings in coming years may be lower than before, if the company’s latest numbers mark the beginning of a trend. That is, increased competition from rivals such as TikTok and tightening advertising budgets at customers pose a risk to both revenues and profitability at Alphabet.
As a long-term investor though, I think the company’s scale and competitive advantage mean it will continue to be a profit machine in future. Taking advantage of the fall in Alphabet shares to add them to my portfolio could turn out to be a rewarding move when looked back on five or 10 years from now. That is why, if I had money available to invest today, I would make that move.
The post Is now the moment to load up on cheap Alphabet shares? appeared first on The Motley Fool UK.
6 shares that we think could be the biggest winners of the stock market crash
The hotshot analysts at The Motley Fool UK’s flagship share-tipping service Share Advisor have just unveiled what they think could be the six best buys for investors right now.
And while timing isn’t everything, the average return of their previous stock picks shows that it could pay to get in early on their best ideas – particularly in this current climate!
What’s more, all six ‘Best Buys Now’ are available to access right now, in just a few clicks.
Learn more
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
Alphabet shares are crashing! Is it time to buy Google?
Why I think Alphabet shares are great value
2 growth stocks that could be huge winners in the next decade and beyond
How I’d invest £1,000 today using the Warren Buffett method
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Alphabet (A shares) and Alphabet (C shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.