Alphabet Is High-Quality and Still Selling at a Discount

  • Alphabet’s (GOOG, GOOGL) core business is remarkably resilient, as shown by its most-recent earnings.
  • New Pixel smartphones and a smartwatch are coming, which could boost earnings and GOOG stock.
  • Consider picking up GOOG shares as they trade at a discount.
Alphabet Inc. (GOOG, GOOGL) and Google logos seen displayed on smartphones

Source: IgorGolovniov / Shutterstock.com

Most big-tech stocks have held up fairly well this year despite market pressure. However, I knew this would not be for long, given the news of continued inflation. Combined with the specter of an upcoming recession, even the biggest tech companies like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) would not be able to catch a bid. Such is what happened with GOOG stock, which is down roughly 20% since early April.

Alphabet, the parent company of Google and YouTube, is among the best tech companies in the market. It has great fundamentals and cash flow. This makes it stand out in an industry that is quite notorious for burning through investor capital.

Moreover, despite its massive $1.5 trillion market capitalization, Alphabet still has a lot of growth opportunities ahead. Therefore, there are plenty of reasons to consider adding GOOG stock to a diversified portfolio.

GOOG Alphabet $2,250.15
GOOGL Alphabet $2,237.44

GOOG Stock Has Solid Fundamentals

In its recently released first-quarter 2022 results, Alphabet has shown the remarkable resilience of its core business. The threat of a slowdown in the economy has caused advertisers to slow down their ad spending. This is unsurprising, as when companies tighten up their budgets, marketing spending tends to be among the first things to go.

The company’s revenue results were still good, though, despite this headwind. Revenue for Q1 came in at $56.02 billion, which is only slightly lower than the $56.07 billion that was expected. Google advertising hit $54.7 billion, translating to a growth rate of 22%. This was much higher than the $54.1 consensus estimate.

The YouTube division is where the company came up short. Advertising revenue on the video platform grew just 14% this quarter, hitting $6.9 billion. This is well short of the $7.4 billion estimated.

YouTube has seen rapid increases in ad sales the past, making it one of the company’s growth engines. Revenue from YouTube grew by 49% in the same period last year. However, competition from ByteDance’s TikTok has stolen some of that limelight.

Regardless of YouTube’s somewhat disappointing results, Alphabet is a diversified business. That means different divisions can pick up the slack for those that are underperforming.

Hardware as a Potential Growth Engine

Google got to show off its new hardware at its recent I/O developer conference. Several interesting projects are in the works, and these moves can put it in direct competition with Apple’s (NASDAQ:AAPL) hardware ecosystem.

First off, the company announced a new and cheaper version of its Pixel 6 smartphone, the Pixel 6a. Priced at $449, it has a strong value proposition. The phone will have a 6.1-inch display, 6GB of RAM and 128GB of storage, and it will run on Google’s Tensor processor. The company also teased the upcoming launch of its next-generation Pixel 7 phones.

Also announced was a new smartwatch, leveraging upon the tech stack of its Fitbit acquisition. This means it will come bundled with a SpO2 sensor and heart rate monitor. There is also the potential for more advanced fitness tracking features, given Fitbit’s expertise on the matter.

The watch will also come with a full ecosystem that includes Google Assistant, Google Home and the upcoming Google Wallet. You can use the watch to look for directions using Google Maps, store documents or make payments. Android is starting to gain some of the advantages Apple has enjoyed by releasing its own hardware.

The Takeaway on GOOG Stock

The company closed the quarter with earnings per share of $24.62. Annualizing this amount implies a P/E ratio of roughly 23 times earnings. For a steady and safe company, that’s not a bad deal.

Furthermore, Alphabet still has a lot of growth potential and new avenues on which to take its business. Assuming its hardware business takes off, the company can start nibbling at Apple’s market share. That could mean billions in additional market cap for Alphabet if it’s successful. Therefore, GOOG stock is a solid addition to any portfolio for investors looking for growth and value.

On the date of publication, Joseph Nograles did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Joseph Nograles is a part-time freelance copywriter focused on the financial industry. He has worked in a wide variety of industries from tech to consulting with one of the “big four.” He has always enjoyed analyzing businesses and has been a CFA charterholder for nearly a decade now.

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