Should you buy Alphabet stock? (Feb 2023)

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Alphabet or Google stock is down almost 13% since reporting earnings on the second February.

That earnings report revealed a 4% decrease in advertising revenue in the fourth quarter. More importantly, a sharp increase in operating expenses meant that earnings shrunk by 17% year over year.

With a share price just below 95 dollars that means the company has a market cap of 1.2 trillion and a cash-rich balance sheet means the enterprise value is around 1.1 trillion.

Although Alphabet earnings were disappointing, they’re not the only reason the share price has fallen.

Last week, Microsoft announced the integration of ChatGPT into it’s Bing search engine. This prompted Google to announce its own AI offering known as Bard.

These announcements led to speculation that Bing could eat into Google’s lead as the world’s most popular search engine. There’s also a question whether search engines are even necessary in a world of conversational AI.

The irony behind these developments is that Alphabet has long been one of the pioneers in artificial intelligence. It’s AlphaGo program was victorious back in 2017,

In fact, artificial intelligence and deep learning are fundamental to all of Alphabets business segments.

Taking a look at the numbers you can see the company looks reasonably valued after the selloff. Enterprise value to EBITDA is under 13 times and enterprise value to free cash flow is under 19 times.

In other words, if you bought Alphabet today, for 1.1 trillion dollars, you’d be paid back in cash in less than 20 years, that’s assuming earnings remains flat.

But Alphabet has a long and consistent history of growth. Revenue has compounded 20% over the last 10 years and earnings have compounded 19%.

Microsoft may be able to gain some market share and regulators pose a risk. But yhe fact is that online advertising continues to be dominated by Google and Meta.

Furthermore, Alphabet has a huge cash pile which it can put to work in various ways.

Assume that Alphabet can grow earnings 10% a year for the next 10 years (half the historical average) and then it trades at 20 times those earnings in 10 years time. That would give the company a market cap of 3.1 trillion and works out to an investment return of 9.9% a year.