Well you certainly don’t see that every day. Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) is down more than 10% in September, entering correction territory. The novel coronavirus continues to weigh heavily on GOOG stock, but the sell-off also represents a unique buying opportunity for one of the best names on Wall Street.
That’s right — I’m still bullish on Alphabet stock despite its struggles this month because I know this downturn is only temporary. The company is facing unique struggles thanks to the Covid-19 pandemic, but Alphabet is too big, too diversified and just too good to remain in the red.
In fact, you may have read my recent report identifying Alphabet as one of my top AI stocks to buy right now. But artificial intelligence isn’t the only reason why I’m liking Alphabet stock these days.
Google Stock at a Glance
Alphabet’s most recent quarter was a disappointment by its own lofty standards. Earnings for the second quarter still beat analysts’ expectations. But the company also showed its first-ever quarter-over-quarter revenue decline, with advertising revenue lighter than expected as advertisers cut spending.
Revenue for the quarter came in at $38.3 billion, compared to analyst expectations of $37.37 billion. Earnings per share was also a beat, at $10.13 versus $8.21.
Revenue for the quarter fell 2% from a year ago, although CFO Ruth Porat said advertisers began increasing their search spending again toward the end of the quarter.
Revenue from Google’s “Other Bets” segment, which includes things like Waymo, the company’s self-driving car business, fell from $162 million a year ago to $148 million in the quarter, registering a $1.11 billion loss.
Google stock is down 10% since September 2, although it’s still showing year-to-date gains of more than 11% overall. That’s somewhat better than the S&P 500, which is up just 4% this year, but is far below the tech-heavy Nasdaq composite’s 21% gain.
Two Headwinds to Watch
It’s been easy in the past for investors to get caught up in the excitement of Google stock. The company does a lot of things right and has its fingers in a lot of profitable pots: internet search and advertising, self-driving cars, artificial intelligence and YouTube. In fact, YouTube along is expected to bring in $18 billion in annual revenue by 2025.
But not everything is perfect. Alphabet has failed to make major inroads in the cloud-computing space, where it had a market share of just 6% at the end of the second quarter. That’s only a marginal increase from the 4.7% market share it had in 2017.
“Google has taken multiple steps to improve this business,” Morgan Stanley analyst Brian Nowak said in a report. “But Google will need to deliver faster growth to get credit (or multiple expansion) for this business.”
Another pressing concern of an altogether different nature is a possible antitrust case to be brought from the Department of Justice. Google confirmed to the Wall Street Journal that the company has been under investigation, and The New York Times reports the case could be brought in just a few weeks.
The case is expected to center on the government’s allegation that Google unfairly dominates the software used to sell ads on websites, the technology surrounding the ad business and the market itself.
The lawsuit will be expensive to defend and litigate, and will have huge implications on how Google’s advertising and search businesses operate.
Alphabet has already paid more than $9 billion in fines for antitrust cases in the European Union. And with a market cap of $1 trillion and case on hand of more than $121 billion, Alphabet stock could easily absorb a fine that big levied by a U.S. court.
But the bigger threat is the possibility that Google will have to change its advertising and search businesses, or even spin off a business segment altogether. If that happens, Alphabet stock could lose some value.
The Bottom Line on Alphabet Stock
Yes, the company has some challenges, and that’s been reflected as of late in the falling stock price.
But there’s more to like than there is to fear for Alphabet stock. The DOJ case will take likely take years to litigate and settle. In the meantime, advertising revenues will begin to bounce back as a Covid-19 vaccine (hopefully) becomes available by the end of the year or in the first quarter of 2021.
Alphabet stock has a “B” rating in my Portfolio Grader right now. This is a good time to pick up shares at a substantial discount.
On the date of publication, Louis Navellier had a long position(s) in GOOG stock. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
