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There’s no question that Alphabet (GOOG -0.25%) (GOOGL -0.25%) has had a disappointing 2022.
With just days left in the year, shares of the Google parent are down 40%, and trading just above their 52-week lows.
The stock has been hit by a combination of slowing growth, falling profits, and compressing valuations in the tech sector as investors prepare for a recession. But the decline has investors wondering if Alphabet will recover next year.
So, will Alphabet stock bounce back in 2023? Let’s take a closer look.
Image source: Getty Images.
Alphabet makes nearly all of its money from advertising, and advertising tends to be a cyclical industry. Businesses ramp up spending when consumers are flush and the return on investment justifies it, and they pull back on advertising when they fear a slowdown in consumer spending and want to cut their budgets. That’s especially true with digital advertising, as businesses can often instantly adjust their spending on platforms like Google.
Alphabet’s revenue growth has slowed sharply this year as the stock has fallen, with revenue growth going from north of 32% at the end of 2021 to just 6% in the third quarter. 
GOOGL data by YCharts
That slide has tracked with a broader pullback in digital ad spending that has hammered social media companies like Meta Platforms, which reported negative revenue growth in the third quarter, and even streaming services such as Roku forecast negative revenue growth for the current quarter as well.
Given that relationship, the best predictor of Alphabet’s performance next year is likely to be the overall economy. Ad revenue and the stock market have fallen this year because most economists expect a recession next year. Companies in a broad range of industries from tech to transportation to retail have complained of macroeconomic uncertainty, and high inflation has led the Federal Reserve to ramp up interest rates, with the Fed funds rate now at 4.25%-4.5%. The Fed expects to raise rates by another 75 basis points next year. However, if the central bank eases off on rate increases sooner than expected, Alphabet is likely to benefit. Investors seem to be pricing in greater economic headwinds next year, so if the economy can avoid a deep recession, Alphabet stock should bounce back.
After profits fell in its most recent quarter, Alphabet management said it was taking steps to rein costs next year. CFO Ruth Porat said on the recent earnings call that headcount in the fourth quarter would grow by less than half of what it did in the third quarter, when Alphabet’s number of employees jumped 24% to 187,000.
Porat said the effects of the slowdown in hiring would become more noticeable in 2023. Unlike other big tech peers, including Amazon and Meta, Alphabet hasn’t announced plans for layoffs, but pressure from investors to rein in costs seems to be building, and layoffs are a possibility. In November, activist investor TCI called on Alphabet to cut costs by reducing headcount and scaling back on its other bets, like its Waymo self-driving unit.
Alphabet stock looks cheap right now, at a price-to-earnings ratio of just 17, or closer to 15 when backing out net cash of $102 billion. That’s cheaper than the P/E ratio of the S&P 500, which is currently 20. Alphabet is also buying back stock after announcing a $70 billion repurchase authorization, which will give earnings per share a boost.
Alphabet will need an economic recovery for its revenue growth to reaccelerate, but the company had demonstrated twice before, during the pandemic and the 2008-09 financial crisis, that its business can rebound quickly from a recession.
While the timing of a recovery is uncertain, given Alphabet’s valuation, its sensitivity to the economic cycle, and its dominance in internet search, the stock will almost certainly bounce back once the economy turns.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon.com, Meta Platforms, and Roku. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Meta Platforms, and Roku. The Motley Fool has a disclosure policy.
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