Near-term regulation concerns have weighed on tech giants recently. Specifically, Alphabet (NASDAQ:GOOG), Facebook (NASDAQ:FB), Twitter (NYSE:TWTR), Snap (NYSE:SNAP), and Amazon (NASDAQ:AMZN) have all fallen over the past several weeks amid what the market is perceiving as a tightening regulatory environment for big tech companies with a ton of data. It’s the kind of thing that could be an issue for Alphabet stock.
But, these near-term concerns aren’t anything to seriously worry about. At worst, regulation levels the playing field for all these guys by constraining the amount of data they use. But regulation constrains everyone, so no one is disadvantaged relative to a competitor. Thus, the competitive operating environment should remain largely the same.
From this perspective, I think buying these tech giants on the dip is the smart move. In particular, one of my favorite investments in that group is Alphabet stock.
I don’t expect Alphabet stock to be a big winner here and now. The price on GOOG stock is fair, and persistent regulation concerns will keep this stock weak until it finds technical support. But, there is a lot to like both about this company and this stock long term. Those plethora of long-term drivers make Alphabet stock a must-own investment for the next three to five years.
Lots to Like About Alphabet Stock
From digital advertising to cloud services to IoT devices to self-driving, there is a lot to like about Alphabet. All those reasons to like Alphabet today will still be around in three to five years. Consequently, Alphabet stock looks like a winner for the foreseeable future.
Digital advertising is the core of Alphabet’s operating business today. This business has consistently grown revenues at a 20%plus rate for the past several years, and while margins have struggled due to a shift towards mobile, traffic acquisition cost growth is moderating and margins are starting to stabilize.
There are concerns out there that this business could get hurt in a big way by regulation. But, if regulation does come in and constrains the amount of data digital advertisers can use, that won’t disadvantage Google relative to Facebook or anyone else.
Everyone will be on the same playing field. And, because consumer engagement is only becoming more digital, ad dollars will continue to flow into the digital channel. Thus, even if Trump and company bring down the regulation hammer, Google should still be the leading player in the secular growth digital ad industry.
Beyond digital advertising, Google’s other big business today is Google Cloud. This business has also been a huge grower. Margins have powered higher. And, there aren’t any regulation concerns. In other words, Google Cloud has all the growth of Google advertising, but none of the margin or regulation risks.
Moreover, the public cloud market is expected to grow at a 20%-plus annualized growth rate over the next five years. Google, as one of the big three players in this industry, will naturally win big as the cloud market continues to grow at a robust rate. Thus, the multi-year growth outlook for Google Cloud is quite promising.
One of the nascent but big potential businesses at Alphabet is IoT. This company has already made a big push into hardware, with a suite of smartphones, tablets, streaming devices, and smart speakers.
But, Alphabet’s IoT business should only get bigger and better over the next several years as the digital search giant more deeply taps into its huge consumer search database to develop next-gen AI technologies.
Considering that this market is expected to grow at a near 30% annualized rate over the next several years, and that Alphabet projects as a leader in the market, it is safe to say that IoT will be a big driver for Alphabet stock in the foreseeable future.
Last, but certainly not least, there is Alphabet’s self-driving business, Waymo. This business is considered head-and-heels above competitors in the self-driving space. Indeed, Waymo is already experimenting with a self-driving ride-hailing service in Phoenix.
The implications of self-driving are huge, and it would be silly to think that Waymo won’t add billions of dollars to Alphabet stock’s market cap over the next several years.
Wait For $1,120
Although there is a lot to like about Alphabet stock in the long run, it will likely remain weak until it finds technical support.
Why? Because the ad business is under pressure from regulators. The IoT business is still nascent and not really mainstream yet. And, the Waymo catalyst has yet to truly arrive.
Thus, three of this company’s four long-term drivers are either financially absent or suffering from bad optics. Against that backdrop, Alphabet is trading at 24X forward earnings, which is a premium to both growth (20% earnings growth estimates) and history (five-year average forward multiple of 20).
All things considered, Alphabet will likely remain weak until this stock finds technical support.
That technical supports comes in at $1,120. That is Alphabet’s 200-day moving average. This stock has consistently held its 200-day over the past three years. Drops down to the 200-day are usually followed by rallies off the 200-day. That same pattern should happen again this time because the fundamentals continue to support a long-term uptrend.
Bottom Line on GOOGL Stock
The investment game-plan for GOOGL stock is simple. You want to own this stock for the long haul. But, regulatory risks will continue to drag Alphabet stock lower in the near-term. This stock won’t bottom until it finds technical support. That technical support comes in at $1,120. Therefore, the dip in Alphabet is one worth buying.
But, be patient, and don’t buy more until the stock is closer to $1,120.
As of this writing, Luke Lango was long GOOG, FB, TWTR, SNAP, and AMZN.