In This Article:
Key Points
-
Alphabet is facing three primary challenges to its current business.
-
It has still put up strong growth despite these headwinds.
-
The stock is historically cheap.
Sometimes, stocks fall to valuations where you can't pass them up. Most of the time, this occurs because of an overwhelming negative sentiment in the market, which tends to swing the pendulum too far in one direction. Warren Buffett once said, "Be fearful when others are greedy and be greedy only when others are fearful."
There is a lot of fear surrounding Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) stock right now, which has caused it to get beaten down. But is it at a point where investors should be buying shares hand over fist?
Alphabet faces some fierce challenges
Alphabet has multiple brands under its umbrella, but the most notable is Google. Google's business model is under attack from all directions, and this has caused the stock to sell off heavily. Alphabet generates 56% of its revenue from Google Search, making it a vital part of its business model. Although the company doesn't break it out individually, investors can easily assume that a large chunk of Alphabet's profits also comes from this business.
One of investors' first issues with Google Search is how it will fare with AI. One of the most high-profile examples of this fear was when Apple's (NASDAQ: AAPL) Chief of Services Eddy Cue stated that he believes AI will replace search one day. This would be a huge problem, but Alphabet is already one step ahead of the curve.
Google has already implemented AI search overviews, which bridge the gap between older search technology and new generative AI models. Alphabet has already stated that this feature is incredibly popular and may be enough to save its business. But it's not stopping there. Google has also developed an AI mode for its search engine, so it's already positioned itself for the new age of AI.
Another fear is that an economic downturn will hurt Alphabet. While this is historically true, advertising is a cyclical business, and revenue eventually returns. So, I'm not worried about a short-term economic headwind, because that has always been a risk with Alphabet stock.
Lastly, investors are worried about a potential government breakup. Alphabet has been found guilty of operating two illegal monopolies (one in search, one in advertising). It's still battling through courts about what the remedy will be (or if it'll still be found guilty if an appeal lands it in front of a higher court).This is a difficult challenge to assess, as multiple outcomes are possible. Typically, spinoffs tend to unlock value for the parent company and newly formed entity, so I'll cling to this fact if Alphabet is forced to sell a part of its business.