- Doubts whether Google can still lead in a changing online advertising market
- Need to cut costs in a tighter macroeconomic cycle
- Regulatory clampdowns and stiffening competition
For years seen as one of tech’s safest bets, 2022 saw the owner of Google hit the skids and its share price slammed. Missing revenue and earnings forecasts in each of its first three quarters of the year was unprecedented as Alphabet’s core digital advertising business came under pressure as consumer spend tightened and advertisers reined in marketing budgets.
This could be merely cyclical but with digital advertising now accounting for about two-thirds of all advertising dollars, grabbing larger market share will get harder in future due to heightened competition. For example, social media platform TikTok continues to attract large amounts of traffic which means advertisers are having to think where best to spend their money – TikTok, Alphabet-owned YouTube or both.
Despite these challenges, there are reasons to be optimistic. Fundsmith Equity (B41YBW7) manager Terry Smith believes the current market pressures should lead Alphabet to have a sharper focus on its main revenue and profit engines of search and online advertising. Smith would like Alphabet to ditch much of its ‘hugely loss-making’ non-core businesses, including the Waymo self-driving technology operation.
Alphabet’s Google Cloud business grew by 38% in the third quarter of 2022 and now accounts for about 10% of the company’s overall revenue, so it’s a handy business to have in the structurally growing cloud computing space.
The pace at which Alphabet can reel in expenses to prevent significant margin erosion will be vital to keeping investors onside in what could be another volatile year for the company.
The shares are cheap for a business of its calibre, trading on 18.5 times forward earnings. Therefore, using some of its vast $100 billion-odd cash pile for further share buybacks seems sensible with the stock trading at a historically low rating.
On a 10-year view the shares have still delivered a 395% return – with the shares going up faster than the growth in earnings per share of 209%.