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For much of the past 10 years, it seemed Alphabet (GOOG 0.97%) (GOOGL 1.09%) could do no wrong. Case in point: In the decade leading up to November 2021, the company grew revenue by 515%, which drove its stock price up by more than 900%.
Then, the bottom dropped out. Macroeconomic headwinds and a persistent bear market caused digital advertising to dry up, hitting the search leader right in the pocketbook. As a result, the stock experienced its worst loss since the Great Recession, falling 39% from its peak.
If you can see past the current wailing and gnashing of teeth, however, the future looks bright for the Google parent. Here are three predictions about what to expect from Alphabet stock in 2023.
Image source: Getty Images.
For the first three quarters of 2022, revenue of $207 billion grew 13% year over year, while earnings per share (EPS) of $3.53 declined 15%. Alphabet’s performance this year has been tepid to say the least, which has some investors wondering if the company’s best days are in the rearview mirror.
In a bid to understand whether a company is in peril or merely a victim of circumstance, a look back can be instructional. In 2021, Alphabet generated revenue of $258 billion, up 41% year over year, while its EPS of $112.20 soared 91%. That hardly seems like the results of a company in trouble.
This shows that the company is feeling the effects of an industrywide slowdown in ad spending. It further suggests that once the economy recovers, digital advertising — and by extension, Alphabet — will rebound nicely.
One of Alphabet’s biggest growth drivers over the past few years has been cloud computing. Google Cloud rose quickly through the rank and file, becoming the fastest-growing cloud provider. Not only has it benefited from the digital transformation and the widespread adoption of cloud computing, it’s challenging its larger rivals.
Google Cloud is the third-largest infrastructure service provider worldwide, trailing just Amazon Web Services (AWS) and Microsoft Azure. More importantly, however, Google continues to steal market share. Its cloud computing revenue grew 48% year over year in the third quarter, besting both Azure and AWS, which increased 35% and 27%, respectively, according to Canalys Research.
If Google Cloud can gain ground and take market share in the middle of the worst economic downturn in more than a decade, how much more will it benefit when the economy eventually finds its footing?
Admittedly, I’m not going out on much of a limb on this prediction. Just two years after its founding in 1998, Google became the world’s largest search engine, indexing more than 1 billion web pages.
In the ensuing years, Google has continued to own the space, not only indexing hundreds of billions of web pages, but controlling a dominant 92% of the worldwide search market. This, in turn, fuels Google’s online advertising business. The company is the undisputed leader, controlling roughly 30% of all global digital ad spending, according to Digiday.
Many have tried to unseat Google’s leading search know-how, but try as they might, nothing comes close to the company’s state-of-the-art algorithms. Don’t expect that to change.
As I pointed out at the beginning, Alphabet stock has suffered its worst decline since 2008, falling roughly 39% from its peak in late 2021. At the same time, however, the company has continued to increase its revenue, maintain its search dominance, and increase its share of the cloud market. Despite its massive potential, the stock trades at just 18 times earnings — its lowest price-to-earnings ratio since 2013.
Given its dirt cheap price, leadership in both search and digital advertising, and its top three position in cloud computing, it’s practically a no-brainer to suggest that Alphabet’s stock price will recover in 2023.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Danny Vena has positions in Alphabet, Amazon.com, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon.com, and Microsoft. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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