With Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) likely to rally over the longer term due to pent-up advertising demand, patient investors should consider buying Alphabet stock on weakness in the next two months.
Among the factors making me more upbeat on Alphabet’s outlook are encouraging third-quarter guidance issued by Snap (NYSE:SNAP) in late July and a bullish note on digital ads earlier this month from KeyBanc.
In the wake of the guidance and note, I believe that Alphabet may already be benefiting from a strong ad rebound.
Snap’s Q3 Guidance and KeyBanc’s Note
As I noted in a previous column, Snap, which owns social-media website Snapchat, reported that sales jumped 32% in the first 19 days in the third quarter on a year-over-year basis. That’s up from 17% in Q2.
Since, like Alphabet, Snap generates the lion’s share of its revenue from digital ads, the huge acceleration of Snap’s revenue in the early days of Q3 bodes very well for Alphabet’s Q3 results. Snap did warn that weaker-than-usual “back-to-school” shopping, film releases, and spectator sports could hurt its Q3 results.
But many sports leagues are returning to action. Moreover, the huge acceleration of Snap’s growth at the beginning of Q3 indicates that the reopening of economies should trump the negative catalysts that Snap cited.
Also boding well for Alphabet’s outlook is a recent note from KeyBanc. On Sept. 14, the firm initiated coverage of multiple digital-ad companies, including Alphabet and Snap, with overweight ratings. KeyBanc thinks that spending on digital ads will ultimately be boosted by the explosive growth of e-commerce.
That makes sense. Many companies, including large retailers Walmart (NYSE:WMT), Home Depot (NYSE:HD) and Target (NYSE:TGT), are looking to compete more effectively with Amazon (NASDAQ:AMZN). Digital ads will likely be a very important weapon in their arsenal. Smaller e-commerce websites like eBay (NASADAQ:EBAY) and Overstock (NASDAQ:OSTK) could also turn to Google in an effort to lure consumers to their websites.
Google’s results could also be meaningfully boosted by the ad spending of newer overseas e-commerce players like Sea (NYSE:SE), which is becoming a major force in Southeast Asia.
The Cloud and Waymo
As I predicted in a column early this year on Alphabet stock, the company’s cloud business is growing rapidly and is on track to move the financial needle for Alphabet. Specifically, in Q2 the unit’s revenue jumped 43% YOY to $3 billion.
Although the division’s growth slowed from 52% in Q1, the deceleration is understandable, given the lockdowns in Q2, and its growth likely accelerated in Q3. Further, a 43% year-over-year jump in revenue is still quite impressive. And finally, the unit accounted for nearly 10% of the company’s revenue (excluding traffic acquisition costs) that came in at $31.6 billion.
Many investors may not realize that, at least according to one estimate, the market share of Google’s cloud infrastructure unit came in at 9% in Q2, fully half of Microsoft’s (NASDAQ:MSFT) 18% share. Since Microsoft is viewed as a huge player in the cloud, maybe it’s time for the Street to start seeing Google’s Cloud unit as a fairly big player in the space, too.
Going forward, the work-from-home trend and acquisitions made by Alphabet could cause the unit’s growth and market share to accelerate even further.
Finally, the company’s self-driving-vehicle unit, Waymo, continues to advance and is likely only a year or two away from generating meaningful revenue that could boost GOOG stock. Waymo recently started testing 13 autonomous trucks in the Dallas area.
The vehicles will have drivers onboard to take over in an emergency. But, given America’s shortage of truck drivers, selling software that makes driving trucks much easier and enables drivers to take shorter breaks could be quite lucrative for Waymo and positive for Alphabet stock.
The Bottom Line on Alphabet Stock
Alphabet has strong, positive, long-term drivers. But amid the recent weakness of large tech stocks and a possible increase in novel coronavirus cases as the weather gets colder, long-term investors should wait for a 10% to 15% decline in Alphabet stock before buying the shares.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.