Amid the Nasdaq bear market, astute investors are finding profitable opportunities out there. Undoubtedly, Alphabet (GOOGL 1,90%) (GOOG 1,56%) is one of them. Here are three reasons to buy the tech giant in 2023.
1. Dominate a huge market
It probably comes as no surprise that Alphabet generates the majority of its revenue—79% in Q3 2022—from advertising. To be precise, Google Search is Alphabet's flagship product; it alone accounted for 57% of total sales last quarter.
The advertising market is cyclical because companies large and small can quickly reduce their ad spend to conserve cash during difficult times. This is exactly what Alphabet was dealing with. Its advertising revenue grew by just 2.5% in the third quarter of last year, compared to growth of 32.6% in the whole of 2021.
Furthermore, the management team, led by CEO Sundar Pichai, recently decided to lay off 12,000 employees, or 6% of the workforce, following similar moves by its big tech peers. This could be a sign that things will get worse before they get better.
However, Google remains incredibly powerful as a gateway to the internet. As online activity increases, with more users and a particular focus on mobile devices, it's easy to be confident in the company's prospects. Indeed, an estimated total addressable digital advertising market of US$1.4 trillion by 2023 presents a huge growth opportunity for Google's bread and butter.
2. Emerging business segments
Beyond Google's dominance in search and its subsequent leadership in the digital advertising market, investors need to learn about two other valuable areas of the business. The first is YouTube. The video-sharing platform generates ad revenue that is on par with the streaming giant. Netflixtotal revenue. And this does not include paid subscriptions to YouTube Premium or YouTube TV.
YouTube is becoming a major streaming option for consumers. Starting this fall, Alphabet will pay $1.4 billion annually for the next seven years in royalties to NFL Sunday Ticket. And earlier this month, YouTube announced it would launch a hub to host free, ad-supported channels that pit it against the... Roku Channel and other similar offers.
Another growing segment is Google Cloud Platform (GCP), Alphabet's answer to the two cloud computing market leaders, Amazon web services and Microsoft Blue sky. As companies shift their technology infrastructures from on-premises to on-demand configurations, GCP should have no problem rapidly growing its revenue, which grew 37.6% year-over-year in the most recent quarter.
While Google Search will undoubtedly be a focus when investors look at Alphabet's empire today, YouTube and GCP will become even more important to the company's success going forward.
3. An extremely interesting assessment
Over the past decade, Alphabet shares have risen 416%, far outperforming the Nasdaq over the same period. But with macro headwinds affecting the business, the stock ended 2022 down 39%. They now trade at a price-to-earnings (P/E) ratio of just 17.5. This is the lowest P/E ratio since 2014.
As of September 30, Alphabet had $116 billion in cash, cash equivalents, and marketable securities on its balance sheet, most of which the company doesn't need for day-to-day operations. If investors were to subtract some of the excess cash from the company's market capitalization, the valuation would become even more attractive.
A bear market can definitely turn even the most optimistic investors into pessimists. But it's always best to look beyond short-term headwinds and consider the company's long-term prospects. Now is a fantastic time to take advantage of Alphabet's valuation and buy shares. This could boost your portfolio's returns in 2023 and beyond.
Suzanne Frey, an Alphabet executive, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is on The Motley Fool's board of directors. Neil Patel holds positions at Alphabet and Amazon.com. The Motley Fool holds positions in and recommends Alphabet, Amazon.com, Microsoft, Netflix, and Roku. The Motley Fool has a disclosure policy.
